Property Insurance and bushfire: Is the threat increasing or is the market just reacting to recent losses?
There is no arguing the devastation that bushfires caused across Australia during Summer 2019-20. Losses paid by the insurance market are now in excess of $2.3 billion. More than 35,000 claims were made on domestic and commercial insurance policies. As a result, insurers are putting greater focus on bushfire exposures when assessing coverage and acceptability of new and existing property risks.
The bushfire outlook for 2020-21 appears to reflect the La Nina climate pattern. This should result in an improved bushfire outlook due to cooler, damper conditions. However, just as insurers minds turn to flood or hail exposure after a such weather events, actuaries, insurers and reinsurers minds have now turned to bushfires!
Policyholders who have property located in ‘bushfire prone areas’ (usually classified by local council), are likely to experience insurers having less appetite to insure their property. This may mean that insurers who are satisfied with the business operations, construction and risk management controls of the premises will be unwilling to deploy their capacity if the area is deemed to be a high-risk bushfire zone. Other insurers may look to use alternative strategies in order to increase the acceptability of risk, most commonly by way of increasing premiums or deductibles. This puts policyholders into a difficult position as they are unable to manage this exposure in any meaningful way. Installation of fire breaks and maintaining clearance will assist to a degree, however, wildfires are often unpredictable in nature and their severity is very dependent on prevailing weather conditions.
Insurer data on this exposure is also incomplete. Whilst industry modelling has been compiled, it is usually done so in a very general way – often homes and businesses will be classified as bushfire risks due to their location (either postcode or street), regardless of their specific circumstances. There are a number of organisations attempting to provide more granular data. These organisations include The University of Melbourne who have developed the Fire Regime Operations Simulation Tool (FROST). FROST aims to predict fire behaviours over the course of the next century however, building reliable data in this area takes significant time. Understanding the substratal vegetation and even specific tree species has an impact on the behaviour of fire.
There is no doubt that Australia is a country faced with weather extremes. Floods, bushfires, cyclones and hailstorms are frequent occurrences. Insurers must have adequate capital to absorb these natural catastrophes. Indeed, insurers have demonstrated the capability to do so over many years. However, insurers returns are being significantly affected by these losses and, as such, the properties exposed to such weather events become increasingly undesirable to underwrite.
If underwriting losses exceed returns, insurers will cease to provide insurance cover at an affordable price. We have already witnessed this in parts of the world such as the USA where cover for bushfire in parts of California is unavailable except via a state scheme known as The California Fair Access to Insurance Requirements (FAIR). That scheme provides very basic last resort cover at a very high price point. Government in Australia, at all levels, is hesitant to provide any such scheme as they themselves are already carrying significant exposure on their own property portfolio.
Unfortunately, the likelihood of the concerns held by insurers in relation to bushfires are unlikely to ease. Just as other weather perils are on the radar and have already been through corrective underwriting, it is likely that bushfire will be at the core of the underwriting process for the foreseeable future.
If you are a property owner seeking insurance in a bushfire prone area, you should:
- Take steps to ensure that your property is well protected. Remember, bushfire losses occur through both direct fire, ember attack and smoke damage. Consider how you can manage all these exposures;
- Demonstrate your risk management approach to bush fire exposures . For instance, if localised backburning has been undertaken, provide this information as part of your submission to insurers;
- Commence the renewal process with adequate time prior your policy due date with your broker; and,
- Ensure your renewal disclosures about your risk profile are thorough and well-articulated. If you feel that your property is being considered by insurers as “bush-fire exposed” when it is not, you should provide accurate and thorough disclosure information to insurers which demonstrate an accurate reflection of your risk, property and its specific location.
Fire insurance was the genesis of property insurance as we know it today – it was conceptualised as a response to the great fire of London in 1666. The public need access to affordable insurance for fire. Insurers need to have a sustainable insurance premium pool to generate returns for their shareholders.
Therefore, it is critical for policyholders to work with their brokers and risk managers wherever possible to mitigate property losses from fire exposures. Bellrock have a Team of experts that we work with to ensure risk is properly identified, managed and presented to insurers. By failing to invest in risk management in the current environment, policyholders should expect difficulties in obtaining insurance.