The world's climate is changing and understanding weather related risk and climate change continue to be fundamentally important to IAG. Weather related risk is a significant component of the total risk equation that needs to be quantified and analysed when we underwrite a general insurance policy. To underwrite these risks successfully means calculating and pricing the risks across the jurisdictions in which we operate, through the utilisation of historical claims information, and spreading that risk across all policy holders. Claims are then paid as they arise. It is therefore imperative that any changes in weather patterns are anticipated.
To put the potential impacts into some context, there have been a number of recent events that have caused significant loss and cost to communities and insurers. Two of the more significant events recent events include the February 2009 Victorian Bushfires which resulted in market losses of $1,070m, and the Brisbane storms in November 2008 which resulted in $309m of market loss. These figures represent an approximation of the insured loss with the total economic losses much higher. These events clearly illustrate the devastating effects of severe events on the community and the size of the financial support supplied by the Insurance industry. With changes to the climate potentially increasing the frequency and severity of events of these nature, it clearly makes sense for IAG to understand and manage the impacts of climate change and work with our stakeholders to mitigate and adapt to the effects.
IAG believes that human induced climate change is a reality and have advocated for some time that early action is required to address the likely impacts. Although the implementation of global mitigation strategies could reduce the amount of global warming that will occur in the future, the momentum in the climate system caused by past and present behaviour dictates ongoing changes in our future climate are inevitable. Increases in the frequency and severity of weather related events are predicted for some key regions in Australia and globally; therefore the implications for general insurers are direct and significant.
The impact to IAG means that as the climate changes, our historical claims experiences can no longer be directly applied to our current and future weather risk pricing, particularly the risk of weather extremes. Our ability to price risk appropriately is critical therefore this could affect the long term sustainability of IAG's business and the availability of insurance to the consumer.
It is the understanding and management of the impacts of these risks that is vital. Whilst the risks themselves cannot be managed, they can be better understood. Within IAG, we have a dedicated Natural Hazards Research Team that ensures that our risk pricing is appropriate for the risk exposure that exists now and into the near future. The Natural Hazards Research Team has identified the key weather elements that produce extensive damage and disruption to communities and are seeking ways to better quantify their future impacts through accurately identifying current risks of such potentially devastating events as extreme bushfires, severe hailstorms, floods and tropical cyclones.
For example, a weather pattern that is currently being observed across Australia is a warming trend, which is predicted to increase in the coming decades and therefore is likely to increase the bush fire danger. Climate change induced alterations to the temperature, humidity and wind climates across Australia, coupled with changes to the weather patterns influencing the region, are likely to lead to shifts in the regions affected by a variety of severe weather phenomena and the severity of these impacts.
Weather analysts from within the Natural Hazards Research Team have also undertaken climate change research in the areas of future tropical cyclone frequencies, intensities and impacts, as well as potential changes to hail impacts across the Greater Sydney region.
It has been argued that climate change could result in a change in either the frequency or the severity of cyclones and other high wind events. Any such changes could affect IAG's risk profile.
As a continuing benefactor of the Cyclone Testing Station at James Cook University we are actively involved in the Station's Management Committee. This is one example of how IAG is contributing to the creation of safer communities and lowering the risk of serious damage caused by tropical cyclones. The Cyclone Testing Station was formed over 30 years ago following two major tropical cyclones, including Cyclone Tracey that devastated Darwin in 1974.
The work undertaken by the Station has been of paramount importance in developing building codes and standards that give us confidence that through improvement in the quality of construction, we will never see a repeat of the extent of the damage that occurred in Cyclone Tracey. The knowledge that these codes and standards are based on sound risk management principles allows IAG to limit its insurance premiums without exposing itself to unacceptable risk.
Further examples of the Cyclone Testing Station's damage investigations were those following Cyclone Larry around Innisfail in 2006 and the Brisbane storms in November 2008. One of the many things that has been learnt through research of this nature, is that one small oversight in the design or construction process can lead to a disproportionate amount of damage should a cyclone or high wind event occur. Insurance companies cannot afford to be complacent with even small details.
IAG recognises that dealing with the impacts of climate change is about good risk management. It is about managing both the impacts of the environment on our business, and those created by IAG through our own environmental footprint. Private insurance plays a crucial social role in enabling communities to recover from the severe weather events that are likely to become more serious as climate change develops—we must ensure that we understand these impacts so that we can manage them and be around in the longer term to help communities get back on their feet when such events occur.
