The end of days? Is the insurance industry about to collapse?

The huge losses the insurance industry is experiencing have other industry stakeholders considering the unthinkable: will the industry collapse? Regulators and insurance leaders in Australia were asked this question at a public hearing of a government inquiry.

The investigation looks at insurance insolvencies and unavailability due to climate-driven disasters, such as the 2022 floods that cost the industry AU$6.3 billion – a country record.

During the proceedings, in the United States, Florida was hit by the first of a series of hurricanes. Estimates suggest that the total cost of insurance for hurricanes Helene and Milton may have fallen by US $ 55 billion.

In late September, heavy rains in Nepal caused floods and landslides. The United Nations reported that more than 200 people died and 4,500 were rescued. The capital, Kathmandu was swept away. However, insurance losses were low.

Meanwhile, Canada experienced its most destructive summer on record with CA$7 billion in losses from floods and wildfires. The UK, particularly Wales, is currently experiencing flooding. Rainfall was unusually high in September and 2023 was the country's wettest year.

In this context, doubting the survival of the insurance industry does not seem far-fetched.

He said to Christopher Wallace, CEO of the Australian Reinsurance Pool Corporation (ARPC), if this collapse happens, will the insurers that are backed and re-insured, like ARPC, be the only ones left?

Wallace said his discussions with the government and the insurance industry have informed him that there is “a lot of momentum” in terms of “sharing ideas on how to reduce disasters in the community.”

“The long-term solution is to reduce the risk, not just to deal with the insurance payment,” said Wallace.

Insurers can “just walk away from the market”

The chief executive of the Actuaries Institute, Elayne Grace, was one of the industry stakeholders who was next to address the questions.

“Is there a risk that the insurance industry will collapse if the climate crisis continues, especially without dramatic reductions in emissions?” asked the chair.

“The insurance industry offers one-year policies,” said Grace. “In that sense, they are just exposed, they can always leave the market.”

However, the CEO was concerned that this meant that it would fall to governments to deal with climate-related disasters. Like Wallace, he said it is important for the government, insurance companies and the public to work together to reduce risk.

Top insurer says industry is sustainable “for now”

“What is the worst case scenario for the insurance industry if emissions do not decrease and if governments do not intervene?” asked Faruqi, this time to Kylie Macfarlane, chief executive of the Insurance Council of Australia (ICA).

“I would say firstly that the insurance industry is very competitive and sustainable at this time,” Macfarlane said. “It exists to create a safety net for Australians to deal with the everyday tragedies that happen.”

However, he said the insurance industry had paid out more than AU$20 billion in extreme weather claims since Australia's 2019-2020 Black Summer bushfires.

Insurtech says parameters could be the answer

Faruqi asked his question again.

“Is the very survival of the insurance industry at serious risk, given our greenhouse gas emissions strategy, unless things change?” he said.

Jonathan Barratt, CEO of insurtech, CelsiusPro Australia, was responding. He said “indemnity-style” insurance is facing problems.

“I think parametric solutions should be encouraged because they provide another way to transfer risk,” Barratt said.

He said there are many insurance providers and insurers involved in the service.

System pressures

“Do you agree that there is a real risk that the insurance industry itself will go down?” asked Faruqi again, this time to academics from Monash University in Melbourne.

“I think it's clear that there is a lot of pressure on the system, on private insurers,” said Dr. Antonia Settle. “As far as whether or not they're going down, or whether the insurers are going down, I think there's probably something different going on there.”

Prepare speeches about homes and financial risk.

“I think the issue is about the decline of their markets and they rely more on government subsidies,” he said.

“The market is failing”

As well as considering the prospect of a complete collapse of the industry, the hearing also looked at the effects of what many see as the current slow-down.

California has seen insurance companies pull out of the home insurance market entirely due to fire risks. Australia has similar challenges covering flood, fire and storm risks in many areas where insurance is unavailable or unaffordable.

Tyrone Shandiman, chairman of the Australian Consumers Insurance Lobby (ACIL) and managing director of the insurance brokerage, said “the market is failing” and called for more government intervention.

Asked by Labor Party Senator Tony Sheldon – deputy chairman of the inquiry – to highlight why he sees the insurance sector failing?

“I spoke to a pensioner up in Townsville who had to sell his unit because he was being charged $16,000, or 40% of his insurance pension,” said Shandiman. “How is that not a market failure?”

He said ACIL has data that shows some consumers pay 20 times more for insurance than others. Many people in high-risk areas, said Shandiman, are now choosing not to take out insurance for these risks and need government assistance.

“Climate ghettos” are proliferating

Karl Mallon said the growing problem is likely to create “climate ghettos” in developed countries.

Mallon is the Sydney-based CEO of The Climate Risk Group.

“In the most difficult cases, we will have to see the purchase of property, which means that the properties must be taken off the market,” he said. “They are not safe and financially unviable, and land rights should be withdrawn and moved to safer places.”

He referred to New Zealand where the purchase of goods has been accepted after some incidents of flooding.

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