I have always argued that, in the end, it would be the insurance industry that would drag governments, probably kicking and screaming, to the climate change table. There’s an end to calling our (and the insurance industry’s) bluff and pretending there’s not a problem. Just ask the people of Lismore in Australia who were severely flooded twice in one month. Or Brisbane, who experienced three floods in one month. In fact, the Federal election on May 21st 2022 asked all of us, and on the whole we screamed “Climate change is a big issue, and we care about it”.
Insurance costs are rising rapidly
Now I know that most of you will have noticed your insurance premiums going up over the past few years. My conversations with friends and professional colleagues are very clear on this.
- Health Insurance
- Motor vehicle insurance
- House insurance
- Public liability insurance
- Professional Indemnity insurance
All rising, year after year. And now it’s happening with a vengeance.
Why the huge insurance increases?
There are several reasons why insurance costs are rising, and rising at a faster rate.
- Natural disasters. Those floods I mentioned above are contributing. So are the cyclones, bushfires and other natural disasters. These events are occurring more often, so insurance companies are experiencing record numbers of claims, and the claims are for bigger amounts of money. Insurance companies transfer a portion of their risk to bigger companies – reinsurance companies. These global reinsurers are increasingly wary of Australia as we experience more, and more severe, weather events.
- Share market decline #1. With natural disaster claims rising in both number and value, the insurers’ profitability is falling, so their share prices decline. Premium increases are one way to fix the profitability problem.
- Share market decline #2. Insurance premiums are not just about pricing risk. They are also about stock market returns. What do they do with all that money that you pay in premiums? They don’t put it under a mattress. It is invested in other markets to achieve a positive return – which contributes to their profits.
- Misbehaviour and the Banking Royal Commission. Many insurance companies are still dealing with the mess of illegal and immoral practices uncovered by the Banking Royal Commission. Some are facing Class Actions, customer refunds and compensation claims.
- Government inaction. Australia has had a decade (actually 2 – 3 decades) of inaction, denial and general nonsense about climate change. Consequently, there has been no certainty for the insurance industry (or anyone else) about a sensible path to deal with it.
What’s in store for insurance premiums?
For all those reasons, insurance companies are now at the pointy end of a dilemma. How can they recover profitability?
- Raise premiums. This is the obvious answer, and what is happening now. Those global reinsurers are demanding more money to take the increased risks that Australia is facing. Certain areas will become more and more expensive to insure
- Stop insuring certain types of events and certain locations. Anyone who has been in a flood, bushfire or cyclone area will know this. Insurance companies simply refuse to insure infrastructure in certain locations – they will become uninsurable.
- Stop insuring certain industries. Some industries are on the nose to insurance companies. Any company that has anything to do with the fossil fuel industries – even if they only supply services – is finding it harder and harder to get affordable (or any) insurance. All suppliers are being hit, including environmental companies that are helping to minimise the long-term effects.
The end result, unfortunately, looks as though Insurance premiums will continue to rise. The rate of increase will probably increase as well as insurance companies strive to recover and increase their profitability. This raises some interesting questions:
- Will the insurance companies pressure governments into action at long last? I’m pretty confident that the answer is yes – if only because the new Federal Government is actually listening.
- Will Governments set up more “insurance pools” where commercial insurance is not available or is too expensive?
- Will we start to see some sensible policies on infrastructure, land-use planning and development decisions? For example, if a property developer wants to build in a flood-prone area that is now uninsurable, will the developer insure the home buyers in perpetuity? If not, who will carry the insurance cost?
- What decisions will business owners make about building infrastructure and operating in high-risk areas? If businesses withdraw, this would look like a capital strike that eventually empties such areas of people and commerce.
The inevitable conclusion for small business owners and managers is that their insurance will both cost more, and possibly be much harder to get.
One of the strategies I advocate for SME owners and managers to protect and grow their business is to continually scan their environment for changes that may impact them. This is one of those changes that they should all have on their radar.