26 Jun 2020
Australian insurers have received more than $5.2 billion in insurance claims related to the 2019-20 season of natural disasters. This colossal figure has serious consequences for Australia’s economy, including the residential development sector, according to the Insurance Council of Australia (ICA).
It highlights the need for a holistic pre-emptive approach to natural disaster management to reduce the risks to communities and industries exposed to natural disasters.
This is a clarion call to the residential property sector, which currently generates more than $100 billion each year for Australia’s economy and is one of our most important job multipliers.
The Insurance Council believes governments need to urgently invest in physical mitigation and resilience programs, alongside improvements to land use planning and stronger building codes, to deal with existing extreme weather risks to communities and the projected impact of climate change.
In early 2019, the ICA stepped up its efforts to manage the impacts of climate change, establishing a Climate Change Action Committee and appointing Tom Davies as the lead in Special Risks, Climate Change.
Karl Sullivan, Head of Risk and Operations at the ICA, says: “We want to see an insurable Australia in a climate-changed future. That is our mission – and this is why we have recruited Tom and established the CCAC to develop a series of climate change-focused programs.
“The cost of reinsurance – where insurers transfer portions of their risk portfolios to other parties – is also rising and indicates the impact that extreme weather is having on the volume and cost of insurance claims. Australia represents just two per cent of the global reinsurance market, but eight per cent of the loss. This is one of the items driving up the cost of insurance premiums for customers.
“Australia has lacked a holistic land-use planning framework. We’ve been building in places that are vulnerable to natural disasters and extreme weather and we’ve homogenised our housing product. We are putting inappropriate structures, built out of inappropriate materials, in inappropriate places. And that is driving the loss,” Karl explains.
“This needs to change – and this is why we are so excited to be partnering with the Green Building Council of Australia (GBCA) on the Future Homes project.”
The ICA recently signed on as a supporting partner of Future Homes, following the launch of the Green Star for Homes strategy in May. This proposes a standard for new single-family homes, underpinned by three pillars: health, resilience and net zero energy. The draft standard will be released for public consultation next month.
GBCA has secured commitments from some of Australia’s biggest volume builders, including Stockland, Metricon and Rawson Homes – a major move given volume builders construct 40 per cent of Australia’s detached homes.
Kate Lyons, Suncorp’s Executive Manager for Reinsurance Strategy and Operations, says the Future Homes project is strategically important “because in many locations we have to start building better than current code”.
“We’re seeing property damage through natural events – like water getting into properties – demonstrating that current building codes just aren’t sufficient.”
Kate, who is chair of the ICA’s Climate Change Action Committee, says ICA is undertaking a study on the sufficiency of modern building codes. “The early insights suggest there are improvements we can make to new builds to make them resilient to the natural perils we see today and that may get worse as a result of climate change”.
“Some improvements that could be made aren’t more expensive than building to code – like flashing and finishing on windows and doors. Others are more material, like the types of roofs on properties.
“As an insurance industry, we are looking to guide better building code practice to help home owners to reduce their losses and obtain affordable insurance premiums. A rating scheme that can call out homes that are more resilient can help us do this,” Kate says.
Karl Sullivan says the ICA has long advocated changes to the National Construction Code to make homes “less brittle to predictable perils”.
Developments relying on today’s minimum standards “will likely experience damage on a more frequent basis and premiums may reflect that heightened vulnerability over time”, Karl explains.
“It’s important for us to understand how climate change will influence the risk profile of certain locations and to build accordingly – or to concede that, at some point, buildings constructed in these areas are no longer viable to maintain and insure.”
Many of Australia's major insurers, Suncorp among them, have released climate action plans, but the Climate Change Action Committee is translating these into practical projects that demonstrate resilient built environments.
The Where we Build, What we Build project, for example, found retrofitting homes across six local government areas in regional South Australia would translate into $72 million in value over a 50-year period. The project has shown that an investment of $28,000 in a resilient home over a typical home has a positive net present value.
“Ultimately, we want to see the development of a standard for resilient homes that gives insurers confidence that homes branded by that standard are a good investment,” Karl says.
”Then insurance companies could look at building out a scheme to back those homes with preferential insurance rates.”
The ICA’s message is clear.
“Members of the Green Building Council of Australia are the industry’s leaders – and we want to back them. Deliver your resilient product and we can help you articulate that value. Let’s create the economic incentive for the best builders to build resilient environments for the future.”