Step 1: Identify

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.

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

South Australia

• Most significant lake filling for Lake Eyre / Kati Thanda since 2010–11 • Annual rainfall lowest on record

Northern Australia

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

Northern Territory

• Late monsoon onset at Darwin in 2018–19 and 2019–20 seasons • Tropical cyclone Trevor (March) caused flooding in the western Gulf coast • Annual rainfall second-lowest on record for the Northern Territory

Western Australia

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

Southeastern Australia

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

Victoria

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

Queensland

• Very large bushfires across southeast Queensland • 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 • Smoke affected many communities for prolonged periods • Severe storms • Warmest year on record • Annual mean maximum temperature highest on record for Sydney • Annual rainfall lowest on record

Tasmania

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