Climate change and Home Insurance - Part 2

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07 Jul 2018, 13:57

A research paper was prepared and submitted to The Actuaries Institute where they collaborated with climate science experts, assessed the impacts and highlighted areas where it required further research. Predicted real increases in the mean claim cost by 2100 were estimated for cyclones, bushfire and riverine flood.

·    Peril : Bushfire

       2013 Claims Cost ($M): 134

       Predicted Increase: 29% to 116%


·      Peril : Cyclone

       2013 Claims Cost ($M): 302

       Predicted Increase: 0% to 230%


·      Peril: Riverine Flood

       2013 Claims Cost ($M): 414

       Predicted Increase: 7% to 54%

The research indicated that the total additional insurance cost to the consumers on account of climate change will not be significant. It means that the incremental change in expected insurance premiums each year would be small relative to the annual industry premium pool and relative to the impact of inflation.

However, the increase in the amount of each individual property insurance premium will not be the same. Also, the highest risk homes will experience the greatest increase in premium.

Findings of the research

·      The research indicated significant affordability issues for home owners at areas of risk from natural perils.

·      There is high uncertainty in the level of future emissions and lack of certainty on the impact of climate on natural perils.

·      A number of potential changes in climate systems could have a significant and relatively sudden impact on claims costs. As home insurance policies usually only offer cover for one year at a time, this could leave communities exposed very abruptly if there is significant increases in premium or a removal of cover.

From the research, it has come out that the greatest uncertainty in future projections obtained from climate models is the level of future emissions, and in particular the effectiveness of any action taken to reduce the emissions.

The pathways for reducing future emission levels were aligned to the climate models and within each pathway, there was certain uncertainty caused by how processes and feedback were represented in the climate models. Our predictions didn’t take into account this uncertainty, the most important of which were “fast acting” and “abrupt” in nature which could cause sudden changes in climate change, as opposed to gradual change. Also, low probability severe events were excluded from the climate models.

There are a certain factors that were missed out during this research which should have been considered while building the climate models. Some of them were:

·         The potential impact of multiple perils occurring simultaneously within a catastrophic event.

·         The impact of abrupt changes in the climate system on capital requirements and pricing.

·         The impact of expected exposure changes due to population growth or conversely the impact of better planning and mitigation against perils.

·         The impact on other property insurance classes as well as health and life insurance.


Further work is required on the changes in capital requirements for insurers due to climate change impacts, and analyses such as the potential for insurers to bear the cost of future events, or the availability and cost of reinsurance capital. Lastly, further research needs to be done on understanding economic rather than insured losses. In particular, non-insured property such as government assets also need to be included.

Thus, we see that actuaries have a vital role to play in understanding the climate science and in interpreting and explaining the impact on insurers and governments, as well as managing the risk.

In the articles to follow, we will discuss about the catastrophe modeling and climate change.

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