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31 August 2022

Insurance implications of extreme weather on business

The increasing severity of extreme weather events around the world is continuing to significantly impact the insurance sector. Insurers have sustained substantial losses as a result of extreme weather claims and also face mounting difficulties in assessing these types of risks. The implications for businesses, individuals and governments are varied and far-reaching.

Unprecedented changes in global weather patterns and extreme weather events – along with the associated increase in expenses from damage claims – have made the accurate underwriting of risk substantially more difficult for insurers. 

In New Zealand, claims for extreme weather events are approaching $200 million for the year ended 30 June 2022, according to data from the Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa (ICNZ).

This year’s total insurance payments look likely to exceed last year’s record amount of $324million, highlighting the continuing increase in climate-related insurance costs.

In its recently launched Wild Weather Tracker, insurer IAG commented that severe weather is becoming more frequent and more damaging to homes and property. It noted that the number of storms, floods and other instances of wild weather recorded in 2021 was 175% higher than the amount recorded 10 years previously. It also reported that during the five-year period from 2017 to 2021, twice as many instances of wild weather occurred than in the five years from 2012 to 2016. 

Bike and car in floodwaters

Extreme weather claims costs are close to $200 million for the year to 30 June 2022 says ICNZ

Escalating build costs and delays

The trend of rising climate-related insurance costs is affecting both insurers and those insured. In particular, more severe and frequent extreme weather events, together with escalating building costs and supply-chain constraints are pushing up premiums.

Crombie Lockwood Chief Broking Officer, Mark Jones says price increases are also filtering through to higher costs for repairing insured damage or replacing lost or damaged goods. Escalating prices are further compounded by the time delays in getting materials and goods into the country.

“These delays might result in a longer settlement for an insurance claim, which in turn increases overheads such as having to pay for alternative accommodation or additional costs to operate the business or hire temporary vehicles. The current tight labour market is also not helping this situation.”

How weather impacts insurance premiums

The impactful nature of increasing extreme weather events has created a number of profitability challenges for insurers with flow-on effects for those insured. 

The unpredictability of such events or natural disasters forces insurers to maintain higher capital reserves. This unpredictability also affects their ability to invest funds raised through premiums to maximise returns and meet capital reserve requirements. To compensate, insurers transfer a percentage of their exposure to external parties such as reinsurers which, in turn, are raising reinsurance premiums to offset their weather- related losses.

Maintaining capital reserves, reducing capital available for investment and purchasing reinsurance all impose additional costs on insurers. These costs are passed on to consumers who may respond by reducing their insurance cover to preserve their costs or because they can no longer afford the insurance, which exacerbates the situation.

Unprecedented changes in weather patterns and extreme weather events have made accurate underwriting of risk more difficult for insurers. 

Invest in resilience to mitigate risks

Governments have a role to play through mitigation activities such as backing engineering solutions to weather-related threats, providing incentives for protective adaptations to properties and subsidising insurance for otherwise uninsurable properties.

Taking measures to reduce climate-related costs is key to maintaining the affordability and availability of insurance. 

In Australia, the Government has introduced legislation for a Federal Government-funded cyclone and flood damage reinsurance pool that is claimed will reduce annual insurance premiums by up to AU$2.9 billion collectively for eligible household, body corporate and small business insurance policies.

ICNZ believes New Zealand should follow the Australian Government’s move and start putting substantial funds aside to reduce the impact of climate change.

It has called on the New Zealand Government to regularly invest in climate change adaptation and risk reduction measures as it says the reduction of risks through investment in resilience is central to maintaining both the affordability and availability of insurance.

Companies may face legal action on climate    

Responsibility for climate change preparedness may involve an associated issue: the potential for legal action against either the company or its directors triggering policies such as directors’ and officers’ liability, based on perceived failures to sufficiently take climate change into consideration.

Mark Jones says the Government’s Companies (Directors Duties) Amendment Bill currently before Parliament makes clear that, as well as acting in the best interests of the company, directors must specifically consider ‘reducing adverse environmental impacts’ in their governance framework.

“Organisations are increasingly looking at their duties relating to environment, social and corporate governance (ESG) and how these relate to climate change and the impact on their business.

“It is yet to be seen in New Zealand whether legal proceedings will arise from these new requirements. However, if overseas experience is anything to go by, we can expect allegations against directors in this space,” says Mark.

Weather-related insurance considerations

As extreme weather becomes more frequent, companies should take note of weather-related insurance considerations.

Mark recommends that companies review their risk profile that relates specifically to extreme weather events and understand how such events could affect their property or business. It is also prudent to put risk mitigation measures in place before an event occurs where possible.

“You should also be aware of climate change and environmental impact-related responsibilities within your company’s directors and officers liability policy,” says Mark.

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