A NIBA Brokers' Guide to Climate Change

CLIMATE CHANGE

A NIBA BROKERS’ GUIDE ISSUE 2 – MARCH 2020

CONTENTS ISSUE 2 FEATURES 4 Step 1: Identify Climate Change: Altering our Perception of Risk 6 Step 2: Communicate The Bare Facts: Communicating Climate Change 8 Step 3: Manage Building Resilience and Managing Climate-related Risk 10 Step 4: Respond

Claims Handling Tips

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The NIBA Broker Guides are brought to you through a partnership of Allianz and NIBA. We hope the knowledge of our subject matter experts, coupled with Allianz’s industry expertise, helps you and your clients prepare for the future.

We welcome ideas for future subjects.

WELCOME DALLAS BOOTH Chief Executive Officer, NIBA

DAVID HOSKING Chief General Manager, Broker and Agency, Allianz

Inside this guide, we examine the critical issue of climate change and provide tools to identify, communicate, manage and respond to your clients’ climate-related risk.

The recent bushfire crisis has thrust climate risk into the national consciousness, all the while the insurance industry is faced with the challenge of transitioning from a ‘known past’, where risks are quantifiable, into an unknown future.

For the general population, it’s the physical risk – bushfire season becoming longer or cyclones migrating poleward, for example – that is top of mind. However, this supplement shines the light on two other types of climate risk, transition risk and litigation risk, that mustn’t be overlooked when identifying and managing risk on behalf of a client.

Communication, like identification, is critical, and brokers have an important role to play in delivering accurate and timely information. As for building resilience and managing climate risk, this guide explores four broad categories for brokers to consider.

Brokers have a reputation for going above and beyond, especially when it matters most, and the NIBA Bushfire Community Support Initiative is a great example of this.

A broker’s response to climate risk, before, during and after an event can have an enormous impact on the client’s road to recovery, and when a broker works collaboratively with the insurer, the outcome can be great.

We hope you find this a relevant and interesting read, particularly in light of the recent and devastating weather events.

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STEP 1: IDENTIFY

CLIMATE CHANGE: ALTERING OUR PERCEPTION OF RISK The unprecedented spate of bushfires impacting huge swathes of southern and eastern Australia throughout the summer of 2019/20 has pushed climate risk firmly into the national consciousness.

Meanwhile, brokers have been grappling with how they can help their clients screen for climate-related exposures and future-proof their businesses. So, what can brokers do to advise clients in managing and mitigating risk? Michelle Dunner investigates.

Finity Consulting Principal Rade Musulin says while the bushfires have undoubtedly brought climate change into the spotlight, it is by no means the only culprit. “In addition to climate change, there are also cyclical effects, like a very strong positive Indian Ocean Dipole, which played a major role in this year’s extreme fires,” he says.

“There are three kinds of risk that arise from the climate problem. There’s what we call physical risk, which is basically bushfire season becoming longer or cyclones migrating poleward that damage the environment and assets.

“Then there’s transition risk – what changes would occur in our economy if we were to move towards decarbonisation?

An example I use that people relate to is what would happen to all the petrol stations in their neighbourhood if they all buy electric vehicles?

“The third one relevant to brokers is litigation risk – the risk that boards of directors, managers and other responsible parties are sued by either shareholders or other entities who say they’ve been damaged from an organisation failing to take action to mitigate climate risk.”

Musulin, an actuary who has worked for over 40 years in catastrophe risk modelling and climate risk, says in the medium term, which of those three risks is most pronounced will depend on how society reacts to the threat of global warming. “If governments, or investors for that matter, push society towards rapid decarbonisation, we’re likely to see long-term physical and litigation risk go down and transition risk go up.

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DataGlobe was designed so we could get existing hazard data out into the hands of the industry, so they can give more finelytuned advice to their clients.

“Regardless of what is done in the short term on emissions, physical risks such as we are seeing from the bushfires will be a key issue due to the lag between emission levels and risk. But transition risk can emerge quickly as government policy changes."

Musulin says insurance companies, in a competitive market, can only price for risk likely to occur within the policy period. “In 2020, they cannot price for climate risk that may occur in 2040. So that creates a problem; usually the insurance system is the mechanism that sends economic signals to the public about risky behaviour. In the case of climate, that mechanism breaks down.

“The way to fix the problem is through encouraging future-proofing building codes and land use policies. The Northern Australia insurance problem is an illustration of what can happen when mitigation is not commensurate with our understanding of risk. That one is largely the result of a technological improvement in the way insurers rated property to better reflect risk.

“The perception of risk changed, and the building stock was deemed not well-engineered. If we knew in 1980 what we do in 2020, we might not have built things where they are or how they were.”

The ‘known past’ where risks are quantifiable, into the unknown future is a key issue for the industry says Mark Howden, Director of the Climate Change Institute at the Australian National University.

“One of the challenges is that we are operating from research models that perhaps are not suited to robust decision making,” Howden says. “That’s not a criticism of the model – it’s an extraordinarily difficult thing to do.”

Howden points to a ‘cascade of uncertainty’ for climate projections. “We then need to look at how much of it impacts on things we value and how much we can adapt to the changes.

“A way forward would be to effectively combine the measured climate changes and the trends in those, with the future projections coming out of the model.”

Karl Sullivan, Head of Risk and Operations at the Insurance Council of Australia (ICA) says a new iteration of the ICA’s DataGlobe will soon provide valuable insights for brokers.

“DataGlobe was designed so we could get existing hazard data out into the hands of the industry, so they can give more finely-tuned advice to their clients,” he says.

“We are currently developing a climate change layer to the dataset that will help inform people not only on today’s risks but also projecting how they might look in 2050 or 2100.

THINGS TO CONSIDER • Investigate trends in particular occupations and geographies to advise on mitigation and management strategies for clients.

• Realise that research and data is ongoing in the climate change space. Make an informed extrapolation for specific risks relevant to your client base.

• Don’t bombard clients with data – it has the propensity to be misunderstood.

Clear communication is paramount.

• There are three types of risk inherent in climate change – physical, transition and litigation.

• Consider how events may disrupt your client’s business and be prepared to have a conversation with them on future-proofing strategies.

2019: A YEAR OF UNPRECEDENTED EVENTS AUSTRALIA • Warmest year on record; mean temperature +1.52 °C • Australia's driest year on record, annual total rainfall 40% below average • One of the strongest positive Indian Ocean Dipole events on record

Northern Australia

Queensland

• Unusually late tropical cyclones in May; Lili in the Top End, and Ann in Queensland

• Very large bushfires across southeast Queensland

Northern Territory • Late monsoon onset at Darwin in 2018–19 and 2019–20 seasons

South Australia

• Tropical cyclone Trevor (March) caused flooding in the western Gulf coast

• Most significant lake filling for Lake Eyre / Kati Thanda since 2010–11

• Annual rainfall second-lowest on record for the Northern Territory

• Annual rainfall lowest on record

• Large areas of flooding in Queensland's tropical coast, and also in the Gulf Country and western Queensland • Severe storms with heavy rain and giant hail in southeast Queensland • Annual mean maximum temperature highest on record for Brisbane

Murray–Darling Basin • Driest year on record for the Murray–Darling Basin

New South Wales • Very large bushfires across eastern New South Wales

Western Australia

• Smoke affected many communities for prolonged periods

• Severe tropical cyclone Veronica caused major flooding on the Pilbara coast

• Severe storms

• Significant rainfall deficiencies across the South West Land Division • Frost events in September caused damage to crops in the southwest • Warmest year on record

Southern Australia • Heatwaves in January and December; high temperature records set, including Australia's warmest day on record (18 December) • July–December rainfall lowest on record

• Warmest year on record • Annual mean maximum temperature highest on record for Sydney

Southeastern Australia

• Annual rainfall lowest on record

• Coolest August mean minimum temperatures on record for parts of the inland southeast

Tasmania

Victoria • Significant rainfall deficiencies for Gippsland • Bushfires in Gippsland and northeast Victoria

• Large bushfires across remote and wilderness areas • Annual mean maximum temperature highest on record for Hobart

Source: Bureau of Meteorology

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STEP 2: COMMUNICATE

THE BARE FACTS: COMMUNICATING CLIMATE CHANGE Effective communication during and after natural disasters can play a huge role in a company’s profits from one year to the next. But what role do brokers play? Nina Hendy speaks to the experts.

The broader insurance industry has never been under greater scrutiny when it comes to communicating accurate and timely information about climate-related risk to clients.

Just in the last year alone, Australia has been battered by a number of catastrophic natural disasters, prompting insurers to put their own communication skills under the spotlight behind closed doors.

Whether it’s fires, floods or storms, the sheer size of each natural disaster event places brokers under immense pressure to communicate in new and improved ways.

A few of the most recent disasters paint the full picture.

The Insurance Council of Australia confirms that insurers have handled more than 23,362* insurance claims from bushfire regions in New South Wales, Queensland, South

Australia and Victoria since November 8. Insurance losses are estimated at $1.9 billion* in total this bushfire season.

During the December/January bushfire crisis, more than 60 insurance staff attended the evacuation centre in Melbourne to talk to evacuees about their needs.

Insurers also booked hundreds of hotel and motel rooms as emergency accommodation, along with organising financial assistance to many customers.

Meanwhile, the severe flooding in Queensland produced overall losses of almost $1 billion - only half of which was insured.

HONESTY THE BEST POLICY It’s fair to say that communication skills are being tested more than any other time in history.

Brokers are in the frontline, so are charged with the task of communicating accurate information about climate change in a credible and relevant manner, in a bid to protect clients from climate-related exposures.

Of course, communication extends way beyond phone etiquette – it’s about showing compassion on the fire ground and organising emergency accommodation for often hundreds of displaced families at a time.

For the past 20 years, reinsurer Munich Re has surveyed natural catastrophes. One report** reads: “It’s not just the number of natural catastrophes studied over the decades has increased … as a result of climate change, but the impact of these events (as anticipated) has also become much greater and more costly.”

The research underscores the importance of really understanding how people react to information about the risk of natural catastrophes. * As at February 14. ** Risks posed by natural disasters.

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FACING FACTS It’s common for people to get bogged down in the cause of climate change and who’s to blame, according to Glen Drinnan, who is the General Manager of Broker Distribution at Allianz.

“Getting past this, it’s hard to debate that our climate is changing, especially when we provide them with the facts. Only when your clients understand how our climate is changing can they turn their attention to how it will impact them,” Drinnan says.

Allianz is taking several steps1 to support climate change issues. The company’s Global CEO Oliver Bate is also co-chairing the Global Investors for Sustainable Development Alliance.

At a local level, Allianz is working with the Insurance Council of Australia to better understand risks linked to climate change, recognising the far-reaching implications.

“Properly understanding the exposure ourselves is the first step towards educating and equipping our customers, so they can make more informed choices about how to manage it,” Drinnan says.

THE BARE TRUTH Professor Benjamin Newell has conducted research titled The Psychology of Climate Change and Communication. His research comes as the increase in the frequency and impact of natural disasters highlights a need to provide the public with accurate information around disaster prevalence.

Professor Newell believes the broader industry has an opportunity to step up and develop strong communication skills around climate change.

In fact, insurers and brokers are well positioned to be an independent non-government voice in the climate change debate, he says.

Brokers are in the frontline, so are charged with the task of communicating accurate information about climate change in a credible and relevant manner, in a bid to protect clients from climate-related exposures.

As such, insurers should take strong leadership in the communication of climate change.

“Insurers need to be as upfront and realistic as possible and describe the risks in ways that people can readily incorporate how changes in the climate (such as global warming) will impact their lives,” Professor Newell says.

“They also need to be clear that the uncertainty of impact (in terms of extremity) should not be taken as a reason not to act – quite the contrary, because uncertainty cuts both ways (upside and downside risk). The more uncertain one is, the more action, such as taking out insurance, is imperative,” he adds.

Drinnan agrees that brokers have a crucial role to play in the communication of climate change, adding that they should develop a bank of credible, fact-based insights to share with clients.

“These should avoid (or limit) opinion pieces and focus on items that will help clients to understand the issue, not attempt to solve it,” Drinnan says.

SPEAK THE SAME LANGUAGE Six definitions that'll get you and your client on the same page • Hazard

Something that makes your situation more risky, such as storing explosives in your house.

• Risk

Meanings include the likelihood of something happening that could cause injury or financial loss, exposure to a specific threat, hazard or peril or uncertainty to the outcome of an event.

• Vulnerability

A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to risk.

• Exposure

The amount of loss a customer could experience.

• Sensitivity

Determines how various sources of uncertainty contribute to overall uncertainty.

• Adaptive capacity

Relates to the ability to adjust to potential damage, take advantage of opportunities or respond to consequences.

1 https://www.allianz.com/en/sustainability/low-carbon-economy/climate-change/climate-strategy1.html

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STEP 3: MANAGE

BUILDING RESILIENCE AND MANAGING CLIMATE CHANGE RISK Restricting global warming to less than two degrees celsius might not sound like it would require a huge change and exercise in risk management, but journalist, Melissa Montang, discovers the reality is quite different.

“It’s clear that costs will continue to rise in time based on the increased severity and frequency of catastrophic loss, which of course will flow through to business owners and the consumers of their goods and services.

“I might sound a little utopian, but essentially everyone needs to pull together and do their bit. Governments, the insurance industry and individuals alike,” says Andrew Lester, Head of Property and Engineering - Broker and Agency at Allianz.

Lester notes two key areas that brokers can use to benefit clients: information and education.

“This includes things like investing in a low carbon economic future, balancing pre- and post-disaster recovery funding, well considered urban planning and building codes, sensible and nuanced public discussion to strike the right balance between risk mitigation and environmental protection."

Without management, the insurance industry is likely to see the impact of climate change as this increased risk cannot be simply absorbed, predicts Lester. The increased net loss burden coupled with catastrophe reinsurance costs that will generally focus on the increased level of severity risk need to be factored into costing and pricing models.

“With this in mind, the priority is to acknowledge that the risk profile of most Australian households (mine included!) and businesses will continue to increase. With this increased risk profile comes a greater emphasis on the need for robust risk assessment, well considered continuity planning and mitigation and a balanced approach to risk transfer with regards to coverage, self-insured retentions and premiums.”

THE ROLE OF BROKERS IN HELPING CLIENTS TO MANAGE RISK Lester notes that the Australian broker community does a fantastic job as advocates for clients and operating as trusted advisors in risk assessment and risk transfer solutions.

“Climate related risk is no different, in that by consulting with and helping their clients to understand the specifics of their current risk profile, as well as how future business strategy may be impacted by this changing risk profile is critical in determining the correct course of action,” he says.

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“Firstly, by focussing the client’s attention on risk assessment and understanding that risk mitigation has a direct link to the future health of their business, brokers would certainly benefit their clients by spending time developing risk control frameworks that include business continuity plans, capital expenditure allocation balanced between business growth and asset protection as well as a clear risk appetite between retained and transferred risk.

“Secondly, keeping on top of the trends and ensuring early engagement with the risk transfer markets. This will help educate the clients on the mechanics behind availability of capacity and conditions of cover specific to natural perils risks and help ensure sustainability of protection along with managing the allocation of costs.”

RESEARCH DRIVEN RISK MANAGEMENT AND RESILIENCE BUILDING Dave Henderson, Chief Research Engineer at the Cyclone Testing Station (CTS) at James Cook University notes that in terms of climate change, a great deal of research has been

We need to keep looking at innovations as they come out.

There may be new materials that become available, but we need to be sure they are fit for purpose and don’t come with unintended consequences.

done particularly in the area of improving the resilience of the built environment and adapting to the change.

“From a cyclone perspective, we think about building codes and what they do for resilience and life safety. There have been massive changes after Cyclone Tracy. This includes strengthening the building code and how houses are constructed, but we also need to be looking at the flood patterns and storm tides and how they’ve changed, which may mean there are places we should no longer build or be building differently.”

One way the QLD government approached improving resilience was through the aptly named Household Resilience Program, which provided funding to help eligible homeowners improve the resilience of their homes against cyclones.

The research done by organisations like the CTS at James Cook University helped to identify what level of durability is now required by new climate extremes, making sure that new building materials and techniques can withstand the climate we face now.

Henderson notes: “We need to keep looking at innovations as they come out. There may be new materials that become available, but we need to be sure they are fit for purpose and don’t come with unintended consequences.”

HOW WILL WE DO THINGS DIFFERENTLY REGARDING BUSHFIRES? It would be remiss not to acknowledge the literally burning question at the forefront of many Australians’ minds: how will we increase our resilience to bushfires in the future to avoid large scale catastrophes like the 2019/20 bushfires?

Similar to how the Cyclone Testing Station approached improving safety and resilience to cyclones in QLD, there are many changes that could be considered to manage bushfire risk in the future.

Landcare Australia notes that adopting traditional Aboriginal burning and Indigenous fire management programs, involving ‘cool’ fires in targeted areas early in the season. The fires burn slowly, reducing fuel loads and creating natural fire breaks. These types of fires are also used to promote biodiversity and the slow speed of the burn gives animals notice to leave the area.

There will also be things we can do to future proof our buildings and homes, from air purifiers and indoor air quality monitors to deal with increasing amounts of bushfire smoke, to using high-performance glazing,

1 Optimal Disaster Preparation by Saeed Nazhati, University of California – The End of Normal – How climate change affects weather patterns and what to do about it (A

insulation and an airtight building (a German concept, the Passivhaus design – adopted in Australia as ‘passive homes’). For homes in bushfire prone areas, passive homes have been designed to meet the development requirements for the highest bushfire risk rating, according to the Australian Passive House Association. These homes can have complex systems of remotely controlled electric shutters, triple glazed windows, fire resistant external cladding and fluid ventilation. The idea of these homes is to balance energy efficiency with strict fire safety standards.

Some experts believe that new technology and artificial intelligence will have a strong role to play in climate change risk management. In his essay Optimal Disaster Preparation1, Saeed Nazhati argued that artificial intelligence can assist with decision-making in times of catastrophe to help ensure efficient and effective recovery.

Essential items such as food, water, energy and transportation are delivered by ‘interdependent critical infrastructure systems (ICISs)’ and impact to these systems by a catastrophe can cause acute disruption. Efficient and effective recovery scheduling, the type that could be provided by artificial intelligence, could restore the functionality of these systems promptly. Feasibility testing of this proposed method has already begun in California, USA as a response to earthquake recovery.

Hopefully advances in risk management such as these can be tested and adopted in Australia to help manage our risk in the face of climate change.

THINGS TO CONSIDER Climate change risk management approaches generally fall into four broad categories2: • Mitigation—efforts to reduce greenhouse gas emissions • Adaptation—increasing building resilience and capacity to cope with changes in climate • Geoengineering/climate engineering— additional, deliberate manipulation that is intended to counteract some of the impacts of greenhouse gas emissions • Knowledge-base expansion—efforts to learn and understand more about the climate system, which can help support proactive risk management.

compendium of essays for the Allianz Climate Risk Research Award 2019).

2 American Meteorological Society Policy Program Study (October 2014)

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STEP 4: RESPOND

CLAIMS HANDLING TIPS

As their broker, you can play an important role by working closely with their insurer in securing emergency accommodation and financial assistance in the interim period.

AFTER AN EVENT • Talk your clients through the claims process Ensure your client knows what to expect from the claims process and manage their expectations in relation to timeframes.

Catherine Troyahn, Manager of Claims Customer Relationships – Northern at Allianz, provides a checklist for responding to your clients' climate-related risks.

BEFORE AN EVENT • Confirm your clients have the appropriate cover

In total loss situations, the insurer will endeavour to settle the claim quickly. Partial settlements may take a little longer as the insurer establishes the extent of the loss.

Identify the parties that are involved in the process of a claim, such as Loss Adjusters, Builders, Engineers etc. and outline the information your client may have to provide to the Insurer or any other parties involved in the claim.

As a broker, you’re in the best position to understand your client’s individual needs and ensure those needs are met.

Providing this context will help your client understand the process.

There are a lot of customers out there that don’t always think it could happen to them. The reality is, it can happen to anyone – brokers play an important role in communicating that.

Brokers can help articulate their client’s needs to ensure the insurer provides adequate support that will help them through the process.

• Discuss a strategy or action plan for possible scenarios It’s important for brokers to discuss how their clients can prepare for those worst-case scenarios.

Those prepared with an action plan will potentially mitigate some of their loss.

Encourage your clients to clean their gutters and remove any rubbish that could fuel a fire or become flying debris in a storm, for example.

It goes without saying that your client’s safety and wellbeing is paramount, so it’s critical they evacuate when they need to.

• Work collaboratively

If the client is under insured, or an exclusion applies, brokers should contact the insurer and discuss how best to communicate that to the client. Working collectively as a team will ensure a much greater outcome for the client.

BUSHFIRE CRISIS • 23,362 claims • $1.9 billion in estimated losses since November 8

DURING AN EVENT • Ensure your clients’ needs are being met As we’ve seen in the recent bushfire crisis, climaterelated events can last for some time, meaning your clients may not be able to return to their properties for days, weeks or even months.

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*As at 14 February 2020

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To the extent permitted by law, Allianz and NIBA excludes responsibility and liability in respect of any loss arising in any way (including by way of negligence) from reliance on the general information contained in this publication or otherwise in connection with it.

The contents of this guide are protected by copyright. Š Allianz Australia Insurance Limited and National Insurance Brokers Association 2020.

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