By Jan McCallum

Decades on the front line against a growing natural disaster threat have given Australia’s insurance industry insights it can share with the rest of the world, according to the Insurance Council of Australia’s globe-trotting climate head Alix Pearce.

But to make hazard reduction a mainstream issue and improve insurance protection, governments, regulators and other stakeholders must be involved too, she says.

“Insurers cannot do this alone, we need collaboration to close the protection gap,” ICA’s general manager of climate, social policy and international engagement told Insurance News.

Underinsurance and non-insurance are global issues, according to Ms Pearce, who has spent two months meeting industry leaders, regulators and front-line organisations in 11 cities across the United States, Europe and Asia.

The trip was funded by the Winston Churchill Trust, and her mission was to investigate the role insurers can play in closing the protection gap through derisking and bolstering community resilience.

She found that increasing hazard risk, development in high-danger areas, assets rising in value and inflationary pressures in rebuilding are key issues across markets.

“We are seeing these challenges compounding to widen the gap between those who can afford insurance in high-risk areas and those who can’t.”

After researching what might seem to be an overwhelming problem, Ms Pearce is optimistic about the industry’s ability to find solutions.

She returned home with many examples of innovation and stakeholders collaborating to find answers to knotty issues.

“One thing that is really clear in the hazard data space is that establishing an authoritative national baseline of current and future risk that is linked with public policy settings is a game-changer for how we tackle future risk.”

She saw how this works in the US, where the Federal Emergency Management Agency draws on a national risk index, overlaid with census data and a definition of vulnerability, to designate the most at-risk places Community Disaster Resilience Zones.

Federal funding is directed to these zones, and all levels of government, the private sector and non-profit partners work with communities to improve resilience.

Ms Pearce visited New York, Washington, London, Cambridge, Amsterdam, The Hague, Munich, Berlin, Zurich, Geneva and Singapore on her trip, and says it became clear that a significant uplift in resilience investment is needed.

Britain has doubled flood investment but still needs an additional £1 billion a year to mitigate the risk.

The Netherlands invests €1 billion a year in flood mitigation and has detailed mapping and live tracking to inform decision-makers in real time about measures that must be maintained and where new investment is required.

“I also heard loud and clear that to continue to manage risk sustainably as disasters compound, rules about where to build new homes and to what standard need to be legally enforceable.”

She found that when such rules are not enshrined in law, pressures arising from growing populations and housing affordability problems restrict authorities’ ability to prevent development on high-hazard land.

She cites a positive example in Norway, where the Natural Disaster Insurance Act – which established a natural disaster pool – requires authorisation to rebuild in high-risk areas following a catastrophe.

Ms Pearce believes the insurtech sector can produce solutions to emerging and growing hazards such as bushfires, hail and flash flooding – once considered secondary perils but which have accounted for the largest global losses in recent years.

Advances can come through improved peril data and modelling to understand threats that “are driving this death by a thousand cuts during the disaster season”.

While visiting Lloyd’s Lab, the London market’s innovation hub, she saw products such as FloodFlash parametric cover being developed. When floodwater reaches a set level, recorded by a smart sensor, it triggers a claim. The record for processing a claim is less than six hours.

The product is aimed at commercial operations that may otherwise be unable to secure cover, and that will accept a lower, faster payout to keep their businesses running.

Australia compares favourably with other nations in terms of coverage against natural disasters, with Swiss Re putting its protection gap at 33%. The US is at 43%, Germany’s gap is 57% and Britain’s 22%.

But Australia is among the developed economies most exposed to climate risk.
“We have also been identified as one of the countries with considerable capacity to adapt and manage this risk,” Ms Pearce says.

“I came away from this trip thinking Australia can be a resilience superpower and exporter of our disaster resilience expertise.”

While she researched what the rest of the world is doing, Ms Pearce attended roundtables and conferences where she was asked about Australian experiences and initiatives.

She attended a United Nations Office for Disaster Risk Reduction summit in Switzerland and explained the federal government’s Hazards Insurance Partnership with the insurance industry, which addresses affordability and availability issues.

She was asked about resilient homes programs in New South Wales and Queensland that provide funds to improve properties or relocate people through buybacks.

“I heard from governments, regulators and reinsurers that they really acknowledged Australia’s leadership in tackling risk by being very proactive in the resilience space.”

There was interest in programs rewarding homeowners for improving resilience, such as the Insurance Council’s work with the Resilient Building Council on the Bushfire Resilience Rating app. The tool, with star ratings and recommendations for actions homeowners can take, is delivering cheaper premiums.

Ms Pearce says it addresses the disconnect “where you can inform consumers of their hazard risk but then not necessarily incentivise to drive down that risk, such as linking resilience to premium discounts”.

Australia is also a pioneer in buying back properties where risk cannot be mitigated.

Programs in NSW and Queensland that include a buyback component have been oversubscribed, and Ms Pearce found other nations are starting to consider such moves, which have been used in the US but are not widely adopted in Europe.

“There was a lot of interest in that, in how to do it well and how to do it in a way that is trauma-informed and brings the community along.”

In studying the role of regulators, Ms Pearce saw how they are setting “guardrails” that encourage innovation.

The Bank of England is leading work on the impact of physical and transition risks for banks and insurers in the UK market.

In Switzerland, she found the International Association of Insurance Supervisors is examining regulators’ role facilitating the scaling and trialling of products to improve access to global reinsurance.

She says regulators can provide guidance that enables industries to collaborate on issues such as climate change without running into anti-competitive practices.

Ms Pearce says being on the disaster front line is an opportunity as well as a challenge for Australia, with public-private partnerships a prime example of building shared understanding of risk and resilience solutions.

Insurers have a powerful role mitigating the effects of climate change, through unlocking and scaling net zero solutions as well as resilience measures.

As investors, they can derisk investment in new emissions reduction technology and support development for market readiness, and they can deliver products that provide some level of coverage in high-risk locations.

Ms Pearce says insurers have an important job helping governments drive down emissions and can be at the forefront of conversations because they are the shock absorber of the economy.

Next, Ms Pearce will publish a report on what she learnt from the trip and engage with Insurance Council members on her findings. She sees an opportunity to take the international insights and have conversations with federal and state governments.

But it is clear that while government balance sheets cannot absorb all shocks, nor can the insurance industry deliver all the answers.

Having seen global efforts, Ms Pearce says the best public-private programs focus on collaboration to drive down underlying risk and commit to investment in resilience, and have incentives and strict controls around risk reduction.

She says while this may be a new era of risk, with extreme weather compounding geopolitical and economic volatility, “throughout history, insurance has played a role in assisting societies to navigate the challenges”.