Extreme weather patterns are causing, and will continue to cause, significant property damage across Australia. The question of "who pays" is becoming a serious issue for insurance companies and governments alike.
Global warming is contributing to unpredictable and violent weather patterns. While it will never be possible to definitely attribute a severe weathercatastrophe to climate change, it increases the conditions that foster these types of events.
Following the astronomical financial damage caused by Hurricane Katrina in the United States in 2005, the question arises as to whether the insurance industry will retreat from offering protection in areas of extreme or catastrophic weather.
Predictions in the Garnaut climate change review outlined increased intensity for tropical cyclones in Queensland and more frequent and severe hailstorms for NSW. It is accepted that in the face of unpredictable consequences insurance premiums will rise. Two major questions arise for the industry: 1) How does climate change affect the industry where historically people who have suffered loss have relied upon insurance for financial support?
2) As climate change has introduced an era of instability, can insurance companies offer innovative solutions rather than simply increase premiums?
Insurers have historically adapted to change. However , the environment is now constantly changing and different permutations of the impact and damage are influencing our understanding of risk.
The insurance industry has managed risk in the past because it has been able to adequately assess it and build a policy framework around it. Managing and regulating climate change- related risk relies heavily upon the availability of accurate, relevant and updated information.
Yet in the face of such unpredictable change it will be become increasingly difficult to determine risks.
Insurance is a form of risk regulation. Through policies, insurance companies can modify behaviour by demanding that certain standards, such as adaptive measures, are met before an applicant may invest in a policy. Currently, victims of the effects of climate change catastrophes rely on pay-outs that are no longer viable as the experience of severe weather activity escalates. The Intergovernmental Panel for Climate Change noted that "social and behavioural issues are a major constraint on action to reduce carbon emissions". By linking financial security to environmental planning, the effect of climate change insurance is a powerful leveraging tool.
If the benefits of insurance are to be realised, adaptation must be proactive rather than reactive.
This is an important distinction.
The industry must attach conditions to policies that ensure its survival and viability while also promoting proactive adaptation.
Despite information or education campaigns, problems still exist with regard to motivating people to take responsible measures to reduce risks associated with climate change.
Government aid, while crucial, is not proactive and can lead to cases of non-insurance or underinsurance.
The Garnaut report suggests that the best role for government is helping individuals make informed decisions and ensuring as far as possible that citizens have access to affordable and effective insurance.
The authors are academics at Macquarie University's department of business law.
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