Here is a must-read for insurance company investors in YESTERday's AFR. Take your time:
Insurers not worth climate risk: UniSuper
Increasing wild weather and rising sea levels are making insurance Australia’s riskiest industry, says UniSuper chief investment officer John Pearce, prompting his fund to take an underweight position in the sector.
Mr Pearce said climate change was ‘‘manifesting in some pretty wild weather’’ and that had major implications for the potential long-term returns generated by insurance companies.
‘‘While some people say wild weather is a function of lots of things, it is consistent with the modelling that the climate scientists have done, so you’ve got to assume that there is some connection there,’’ said Mr Pearce, who manages $90 billion of retirement savings for employees of Australia’s university sector.
‘‘If you look at it at a sector level, I don’t like the insurance sector for this reason, so we are very light in terms of general insurance.
’’The insurance sector itself does not hide from this risk, and has become one of the most vocal champions of climate action in corporate Australia, particularly adaptation to climate change.
But the fact big superannuation funds such as UniSuper are beginning to avoid the sector because of its exposure to climate risk will further complicate what is already a conundrum for insurers.
It is part of an accelerating trend for investors and other financial services companies – urged on by regulators – to reduce their exposure to climate risk. Federal Resources Minister Keith Pitt has urged a government-controlled parliamentary committee to investigate the trend, but city-based government members are wary of the move.
The Bureau of Meteorology’s annual update on Australia’s climate, published on Friday, revealed global warming was continuing. It found 2020 was Australia’s fourth warmest year on record, despite a La Nina system – associated with cooler, wetter weather – developing towards the end of the year. Since 1910, Australia’s average temperature has risen 1.44 degrees centigrade, higher than the global average rise of about 1.15 degrees.In the northern hemisphere, 2020 brought the worst hurricane season on record, contributing to total natural catastrophe losses globally of $US210 billion ($271 billion), according to global reinsurer Munich Re.
Climate scientists are clear that the risk of extreme weather is increasing as the world warms, bringing heavier rain and hailstorms, more violent cyclones, longer bushfire seasons, rising sea levels and more extremely hot days. But the exact nature of the risk – and how to price it – has proved almost impossible to predict because there is no precedent for what might happen.
As a result, insurers have found themselves caught without enough cash in reserves to meet the cost of extreme weather events with embarrassing regularity over the past decade.
Last financial year that happened to Australia’s two biggest domestic insurers, Insurance Australia Group and Suncorp. A more clement 2021 financial year so far has given them a breather from extreme weather events, although IAG, in particular, has other problems relating to the coronavirus pandemic. But none expect this to last.
QBE, which is an international business, avoided the worst effects of last summer’s bushfires and hailstorms in Australia, but it said that this year (it reports in line with the calendar year) it would report a $US1.5 billion loss partly as a result of bad weather in north America. That included winemakers claiming on crop insurance after fires in California’s Napa Valley tore through their vineyards.
It will be the second time in three years QBE has reported a loss of more than $1 billion.
Citi analyst Nigel Pittaway lamented the fact it was becoming a ‘‘long-term habit’’ for QBE to issue a profit downgrade just before Christmas.
Insurers around the world are pouring money into research that will help them predict how climate change will affect extreme weather. IAG produced a major piece of work last year that found in many areas things were worse than expected. UniSuper’s stance suggests if insurers do not start accurately predicting and pricing the physical risk of climate change, they could find the well of capital drying up.
_________________________
Ash here.
That last sentence sums it up: Insurers must accurately price the risk they assume, even require over-compensation for catastrophe cover.
I expect every climate change denier on Hot Copper to scribe thousands of words to tell me, John Pierce and the BoM why we are all wrong.
Don't bother. The issue before us is another: if insurers expect wilder weather in the future, they must price and reinsure for it or die.
I have earlier been encouraged by QBE's 9% premium rise in the last year. Will it be enough?
(20min delay)