Australia analyses calamitous cost of climate change on property

Australia analyses calamitous cost of climate change on property

19 May 2016

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Australia — Paul Epworth lost his house, car and most of his possessions in a bushfire in 2009 that ripped through his neighbourhood in Bendigo, Victoria, about 150km north west of Melbourne.

“I remember getting back to our house and seeing it was burnt to the ground and our shed was just a mass of twisted iron,” he says. “It’s the loss of personal things you can’t replace, like family photos, which hurts most.”

The 2009 Black Saturday bushfires in the state of Victoria that broke out on February 7 that year rank among Australia’s worst natural disasters. Some 173 people were killed when 400 fires — fuelled by strong winds and an exceptional heatwave — spread rapidly across large swaths of the state.

Seven years on, many communities are still struggling to recover from the disaster, which burnt about 450,000 hectares of land, destroyed 2,000 homes and shut dozens of businesses. Black Saturday is one of several natural disasters in recent years, which have prompted Australian authorities, businesses and communities to study the costs of such events and how better to prepare for them.

In 2010 a government inquiry estimated the economic cost of Black Saturday at A$4.4bn ($3.3bn) with insurance claims of A$1.2bn. New research published by the Australian Business Roundtable for Disaster Resilience & Safer Communities, which reviewed the economic and social costs of Black Saturday and other national disasters, found that the true costs of disasters are at least 50 per cent higher than estimated.

“This is a conservative number,” says Peter Harmer, chief executive of Insurance Australia Group (IAG) and a member of the Roundtable. “If you include the increase in domestic violence, the increase in alcohol and substance abuse, the increase in school truancy etc — and the long-term impact on societies which are rent asunder by disasters — it would probably be larger.”

The Australian Business Roundtable estimates natural disasters caused A$9bn of damage in 2015 — about 0.6 per cent of Australia’s gross domestic product — and this annual figure is expected to double by 2030, according to financial modelling conducted by Deloitte Access Economics.

The increasing threat posed by weather-related disasters linked to climate change is one of the reasons for the creation of the Australian Business Roundtable, which comprises the chief executives of some of the country’s biggest companies and the Australian Red Cross. It lobbies the government, businesses and others to take a more co-ordinated national approach to make communities more resilient, keep people safe and reduce the costs of natural disasters.

One of the main findings of its work is that spending more on pre-disaster mitigation and critical infrastructure that builds community resilience — such as electricity networks, weirs and bridges — could vastly reduce the economic costs of disasters.

Five of the 11 biggest fires on Black Saturday, including the Kilmore East fire that killed 119 people, were caused by faults in the electricity distribution network. “We have found that if the government could invest A$250m per year in mitigation work the savings to the federal budget would be in excess of A$12bn by 2030,” says Mr Harmer.

A combination of government budget pressures and short-term thinking has meant public funding is often skewed towards emergency response. A report by Australia’s Productivity Commission last year found the government spent A$11bn on disaster recovery between 2009 and 2013, compared with just A$225 m on mitigation efforts.

IAG is considering alternatives to fund infrastructure that can build resilience, such as issuing social impact bonds, financial instruments that pay a return based on the achievement of agreed social outcomes.

“We’ve come to the realisation that we just can’t keep badgering government to spend money that they clearly don’t have,” says Mr Harmer.

The Roundtable has identified a lack of adequate planning as a hurdle to building resilience. It believes local planning authorities need to consider the risks of building in flood plains or areas prone to forest fires and set appropriate regulations.

Homeowners play a critical role in mitigating risks to their properties. Peter Hoeppe, head of reinsurer Munich Re’s geo risks research unit, says measures such as flood protections or reinforced roofs to guard against high winds, storms and hail can potentially reduce the costs associated with climate risks.

Simple precautions such as trimming trees near properties, removing balcony furniture and clearing gutters can do a lot to protect homes from cyclones.

A global study by Munich Re found that total financial losses from natural catastrophes worldwide in 2015 amounted to $100bn, with insured losses at $30bn.

Some homeowners in North Queensland — an area prone to cyclones and regular flooding — find that insurance premiums are unaffordable.

Mr Harmer says it is important to educate consumers on the risks of flooding before they purchase a property in vulnerable regions.

IAG has begun offering an InsureLite product that is specially tailored to consumers who cannot afford comprehensive home insurance. This is a cheaper product that provides customers with a basic accommodation option — building a standard three-bedroom home up to the value of A$200,000 — rather than rebuilding their property with its original specifications if it is destroyed.

“We . . . realise there is an affordability problem, particularly in far north Queensland and we want to ensure that customers still have the safety net of an insurance policy,” says Mr Harmer.

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