Where there’s smoke, there should be cover

Where there’s smoke, there should be cover

How smoke haze, lost bees and needy pumpkins added to lost millions this summer – and what insurance can do to help next time

By Miranda Maxwell

Before COVID-19, when toilet paper didn’t come top of consumers’ must-have lists, face masks were already a hot commodity for a very different reason: PM2.5.

This stands for particulate matter that is 2.5 microns or less in width and found in the bushfire smoke which reduced visibility and caused the air to appear hazy so dramatically in January.

PM2 facemasks, able to filter out these fine particles and prevent them being inhaled, were worn by many Australians for the first time as summer bushfires turned more than a fifth of Australia’s forests to ash – an unprecedented amount to burn on any continent in a single season.

Air quality in Canberra and Melbourne during January made headlines for being the worst in any city in the world, inferior to New Delhi, Lahore or Beijing. Chemists and hardware stores rapidly sold out of facemasks.

The catastrophic bushfires spewed around 900 million tonnes of carbon dioxide into the atmosphere. That’s roughly the equivalent of a year’s worth of emissions from commercial aircraft worldwide.

The Medical Journal of Australia estimates that bushfire smoke was responsible for 417 deaths, 1124 hospitalisations for cardiovascular problems and 2027 for respiratory problems, as well as 1305 presentations to emergency departments with asthma.

“We did not attempt to estimate health effects for which exposure–response relationships are less well characterised, such as primary health care attendances and ambulance calls,” an article posted online on March 23 says.

“Our findings indicate that the smoke-related health impact was substantial. Smoke is just one of many problems that will intensify with the increasing frequency and severity of major bushfires associated with climate change.”

Steven Prince, the director of Ovens Valley Insurance Brokers in Myrtleford in northeast Victoria’s Alpine Shire, was evacuated on three separate occasions as the flames advanced. Weeks later, the crisis over, he is telling Insurance News a story about a pumpkin seed farmer.

Hazy days: Sydney has regularly been draped in smoke this year

“I know a gentleman who grows pumpkins for pumpkin seeds, but bees couldn’t pollinate the flowers because of the smoke. All his pumpkin stock is now getting fed to the cattle because it is useless.”

While flames devastated property and lives, the agriculture sector, most notably vineyards, lost millions in annual income from the associated smoke haze. The entire 2020 crop in some parts of the New South Wales Hunter Valley and Adelaide Hills wine regions were rendered useless, while many growers are picking only a fraction of their fruit.

“There’s no real coverage for smoke pollution,” Mr Prince says. “I know a few people hit hard on the crop side because they haven’t been able to get the crop pollinated. Lots of smoke has damaged it, and because they haven’t been burned out by the fires there are no handouts from the Government.”

Smoke haze and its devastating impact on health, activities and business is a largely uninsured peril.

But that could be about to change. A policy already available in Singapore may hold some answers for insurers and Australians seeking cover from the fallout of smoke haze.

Alex Pui, Natural Catastrophe Risk Manager Asia Pacific at Swiss Re Corporate Solutions, the commercial insurance arm of the Swiss Re Group, worked with Harvard University engineers and scientists to develop the world’s first parametric smoke haze insurance.

Called HazeShield, it was created to allow Singaporeans to insure against smoke haze pollution from Indonesian forest fires.

In 2015, fires in Kalimantan and Sumatra caused neighbours Brunei, Malaysia and Singapore to close schools and warn people to stay indoors due to the haze.

The 2015 southeast Asian haze crisis impacted Singapore’s transportation, tourism, health and education sectors, leading to estimated economic losses of $US900 million.

“The financial consequences of a haze event can be severe, especially when businesses need to suspend operations or close down,” Didier Bélot, Head Southeast Asia at Swiss Re Corporate Solutions, said at the product’s launch in 2018.

“Up until now, conventional property insurance did not cover the financial losses resulting from a haze event. We designed HazeShield to bridge this gap, address a local issue and provide an extra layer of resilience.”

HazeShield complements traditional property insurance policies, giving clients quick access to money.

“When you get a critical mass impacting people more broadly, that focuses people’s attention and they start asking relevant questions about insurance cover.”

It is pegged to independent pollutant standards index (PSI) metrics measured by the National Environment Agency of Singapore. Businesses receive an automatic payout as soon as the air quality dips below pre-defined thresholds.

One variation of the product extends the cover after a number of days below a certain threshold, indicating a protracted and severe bushfire season.

Mr Pui tells Insurance News parametric solutions could offer an answer to smoke haze insurance cover in Australia if something similar to HazeShield was adopted here. It leverages technology and data to insure against non-damage business interruption losses.

“It addresses similar pain points – like loss of revenue due to tourism downturn [or] outdoor event cancellation,” he says.

HazeShield was developed specifically to address the problem that traditional business interruption policies are based on property being damaged – which is useless when such things as unpollinated crops or smoke-affected grapes are considered.

“As you can see with coronavirus, businesses are being severely impacted although there is no traditional property damage,” Mr Pui says. “As underlying climate risk and technologies evolve, we ought to adapt insurance products accordingly.”

While its impact on events is small compared with the mass closures brought about by the COVID-19 pandemic, major summer events in New South Wales and Victoria were cancelled due to the smoke haze this year.

Business interruption or event cancellation policies do respond to smoke haze if it is listed, but Sportscover Australia Chief Executive Simon Allatson tells Insurance News very few, if any, organisations would have air quality listed as a particular risk.

“I’d imagine that a lawn bowls club in the middle of Sydney would probably not think that they would need to be too concerned about smoke haze stemming from a bushfire that’s happening west of the Blue Mountains or in the Hunter Valley,” he says. “But that is what was experienced this year.

“We’ve had no claims regarding that.”

The extent of the smoke haze problem this summer will focus attention on how better to manage and prepare for subsequent events, but affordability is likely to be a problem for many sporting and entertainment operators.

The more specific cover becomes, the more the premium is likely to increase, which is an issue for a lot of sporting clubs and tourist operators around the country that operate on very minimal revenue streams.

“When you get a critical mass impacting people more broadly, that focuses people’s attention and they start asking relevant questions about insurance cover,” Mr Allatson says. “Whether or not that translates into more people taking out this type of cover or not we will have to wait and see.”

Some major sporting groups have already moved to include the smoke hazard in their list of risks that need to be managed.

The Australian Football League (AFL), for example, advised clubs it would suspend or delay play if the concentration of PM2.5 particulate matter is more than 150, while a reading of above 100 would require officials to make a decision on whether a game started or continued.

The Australian Open tennis tournament in Melbourne was badly affected by smoke on its open-air courts this year, and at one point was close to having to call a halt.

The organisers hastily devised a new air quality policy after weathering global criticism for allowing qualifiers to play under a blanket of thick smoke haze.

“Who wants to bring their families to that sort of environment and sit in the caravan park where the index is at 400 plus each day?”

The new policy states play may be suspended when there are between 97 and 200 PM2.5 units present in concentrate readings. If the threshold of 200 units is passed, play will be suspended.

Victoria’s Environment Protection Authority rates 97- 370 as “very poor” and above 370 as “hazardous” in its daily forecasts for likely air quality in the next 24 hours.

On New Year’s Day, the particulate matter levels in Canberra rose to more than 800 micrograms, while Sydney recorded 500 micrograms in December.

For those closer to the fires, the air quality was even worse. Mr Prince says levels in the Alpine Shire were “pretty bad for about eight days, with the index at 450- 600 each day”.

This has health implications for everyone, and was especially brutal for the tourism and agricultural industries. Yet few companies and organisations, if any, were insured against this type of crisis.

Some businesses in northern Victoria were able to claim three weeks of business interruption, helped by a letter from the Alpine Shire Council that they must close their businesses and evacuate.

“Without the shire demonstrating that on letterhead, we would have really struggled, I think,” says Mr Prince, who adds that assessors and insurers “have done an outstanding job” and managed claims efficiently in difficult circumstances.

Areas further from the flames but still affected by the thick blanket of smoke, such as the Victorian country tourist centres of Beechworth and Rutherglen, lacked an official evacuation order despite decimated tourist numbers in the vital holiday months.

“There was no tourism,” Mr Prince says. “Who wants to bring their families to that sort of environment and sit in the caravan park where the index is at 400 plus each day?

“Small business-owners have families and you can’t have small kids around you. So they have to keep their shops closed, evacuate and stay away from the area – especially if you have kids with asthma or any health issues.

“It’s just not safe, but you don’t have that sort of cover built in to your insurance. Wordings aren’t geared up following an evacuation, even a two-week window of indemnity following roads reopening would help business owners for loss of attraction.”

Employers are required to provide a safe and healthy workplace for their workers, so there are implications for workers’ compensation. Poor visibility also brings a higher risk of accidents resulting in injury and property damage.

Bushfire risk has increased over time as fire seasons start earlier and finish later. Extreme fire weather becomes more severe with climate change.

The medical community is urging more government investment in air quality monitoring, forecasting and research on public health messaging, and exposure-reduction measures to protect Australians from bushfire smoke.

An “urgent” call for a national health protection strategy published by the Medical Journal of Australia says managing the health impacts of fire smoke should be integral to fire planning and bushfire emergency responses.

All these aspects could be made more efficient through the application of parametric solutions, Swiss Re’s Mr Pui says. But proper due diligence must first be performed on the exposures and a deep understanding of the underlying risk drivers developed.

“Despite these upfront investments, I strongly believe the benefits of parametric insurance – quick payouts that help with liquidity and definitive claim settlements, and scalability of the solution – once developed, will add tremendous value.

“They are key to reducing the protection gap.”