Extreme weather events caused by the climate emergency are an existential threat to homeowners and industry alike

It was the Monday after the Warragamba Dam overflowed that Dr Kim Loo began to understand the scale of what was happening. A patient had called in to her clinic in Riverstone in Sydney’s west to cancel an appointment to pick up a prescription as the bridge into town was out.

Loo, chair of the New South Wales chapter of Doctors for the Environment, has lived and worked in western Sydney her whole life. Over the years she has watched the market gardens once run by Maltese families out on the flood plain give way to new housing as developers have paved over the open ground.

Now it was happening again. First came fire, now came the flood.

“This is not just the floods, it’s the smoke and the heat and Covid and everything else,” she says. “Every single disaster, we seem to be on the pointy end of it. We already hit two degrees above average during the black summer. We had the hailstorms in eastern Sydney. Now, with this, I imagine whole areas will be uninsurable.”

After the events of the past two years, that question – what is going to happen with insurance? – is proving increasingly significant for entire communities and the insurance industry as they confront a climate-shocked future.

Mark Leplastrier, an atmospheric scientist who heads up Insurance Australia Group’s (IAG) natural perils unit, says this specific flooding event was no surprise. As Australia moves between El Niño and La Niña cycles, significant weather events tend to cluster. The role of climate change, Leplastrier says, is to make weather events a little worse with each passing cycle.

“Every disaster, every new major event – a cyclone, a flood, a bushfire, a hailstorm – provides a chance to test your underlying assumptions,” Leplastrier says. “The main thing is, with climate change in the background of a natural variability cycle, if you have the same event coming back, and you have more warming, you have extra rainfall or intensity associated with that.

“So that’s the question: how exactly is it going to play out?”

The industry calls these events “natural perils” and ranks them according to severity. Flood, fire and hailstorms are “secondary perils”, events that can sometimes last only a few minutes or hours but rack up millions of dollars in damage. “Primary perils” are major events such as earthquakes and cyclones.

While a flood may be costly thanks to the expensive recovery process that follows, the nightmare scenario is for a cyclone to slam into a heavily populated area in a region such as south-east Queensland. While the chance of this happening would have once been considered zero, climate change means the possibility can no longer be totally discounted.

And the cost of these events is mounting. Though it is too early to know the full cost of the current one-in-100-year flooding event, the Insurance Council of Australia has already declared a catastrophe for NSW and south-east Queensland. With more than 17,000 insurance claims filed as of Wednesday morning, an early industry estimate puts the total estimated damage across two states at $254.2m.

By contrast, the cost to just four insurers – Allianz, QBE Insurance, Suncorp and IAG – in the wake of the black summer bushfires was $721m. Meanwhile the industry as a whole lost $5.3bn paying out for damage caused by bushfire, flood and hailstorms during the first quarter of 2020.

The scale of damage and the size of the loss incurred by IAG and Suncorp alone was so great the companies burned through their catastrophe allowances and had to draw on their reinsurance contracts – the insurance for insurers – prompting the world’s largest reinsurer, Swiss Re, to publicly lash the companies for consistently failing to predict the cost of natural disasters.

Viewed over time, the impact is stark. Graphs published by the Australian Prudential Regulatory Authority (Apra) recording the financial profitability of the insurance industry were dominated by gentle curves before 2015. Beyond that point, the lines become jagged and the graphs saw-toothed.

The longer this goes on, the more the industry has been passing the cost on to the consumer.

Dr Chloe Lucas from the University of Tasmania studies the social impacts of climate change and says prices are rising as the insurers change the way they do business. Under the old “community model”, the price of coverage would be calculated at the level of a neighbourhood, suburb, town or region.

This meant those who were a little more exposed to flood or fire would have their coverage subsidised by those who weren’t and everyone was better off.

Thanks to big data, insurance companies are now able to drill down to the level of a single household and price them accordingly, driving premiums up for some and lowering them for others.

“The industry has moved as best-practice to individualised pricing, as it gives a signal about risk,” Lucas says. “People will become more aware about climate risk and will be more likely to move, but in reality people can’t afford to move their house and they get stuck there.

“That means people will have to pay ridiculous prices or have no cover at all.”

The result has been a growing inequity between those who can afford to pay, and those who can’t. The growing divide was so concerning to Apra, its executive board member Geoff Summerhayes gave a stark warning in a speech last October.