The Australian Bureau of Meteorology reports 2005 was Australia’s warmest year since reliable widespread temperature observations began in 1910. In 2005, Australia’s mean temperature was 1.09% above the 1961-1990 average. In 2006 it was 0.47% above average. The Bureau’s annual report also indicates rainfall distribution in 2006 resulted in the third driest year on record for Victoria and Tasmania and the second driest on record for the broader south-eastern region of Australia.
Many experts suggest this is a component of rapid global climate change. They also suggest global warming, while a natural phenomenon is accelerated by human activity including the emission of greenhouse gases.
Increased temperature is expected to lead to more frequent extreme climate and weather events such as cyclones, severe storms, windstorms, hailstorms, floods and bushfires.
Australia has had its fair share. Some of the significant events listed by The Bureau of Meteorology as “severe” include several cyclones affecting Northern Australia e.g.Monica (Apr 2006), Larry & Glenda (Mar 2006), thunderstorms in Melbourne (Dec 03), hailstorm in Esperance (Dec 2004), a tornado in East Fremantle (Aug 1999), severe hailstorm in Sydney’s eastern suburbs (Apr 1999), hailstorms in Brisbane (Dec 1998), thunder storms and tornadoes in Armidale (Sep 1996), severe thunderstorms and wind gusts on Sydney’s North Shore.
The estimated cost from these events alone is in excess of $3 billion. This is before including the Ash Wednesday bushfires in Victoria and South Australia (Feb1983) and Cyclone Tracey in Darwin (Dec 1974).
The consequences of climate change are being felt today and some suggest they may be experienced on a larger & accelerating scale in the future. Some of the insurance implications of global warming are considered below under three risk categories; fire, wind and water.
FIRE
Hot, dry conditions increase the risk of fire. In 2006 and 2007 devastating bushfires occurred throughout Australia. Southern California, southern France, Malaysia and Indonesia are also particularly fire prone and reports of forest fires threatening life and property are common.
In general terms an Industrial Special Risks Policy covers physical loss destruction or damage and the loss of profit associated with this damage unless the peril or property is excluded.
Fire is not an excluded peril and provided the affected property is not excluded the physical loss from fire is covered. The Business Interruption loss which flows from the damage to insured property may also be covered.
Business Interruption may occur even though there has been no property damage owned by the Insured. Access to areas may be restricted, services such as water and power may be unavailable, and suppliers may be unable to provide products or raw materials.
The insurance cover may be extended to respond to the loss of profit which flows from property damage to these risks.
WIND
Some experts suggest increased temperatures cause more extreme wind events such as cyclones, hurricanes, tornadoes and severe windstorms. Was Hurricane Katrina, with its catastrophic impact on New Orleans in August 2005, a result of climate change? Events such as these often also involve the risk of damage or loss by water.
As with fire, an Industrial Special Risks Policy does not exclude”wind” and physical loss, damage or destruction to insured property and any consequent Business Interruption from this risk is covered.
Cyclones can cause significant damage to growing crops. This was painfully obvious to banana farmers in Innisfail and Tully in Queensland in March 2006 when Cyclone Larry flattened crops severing a large portion of the supply of bananas throughout Australia.
An Industrial Special Risks Policy excludes “growing crops” and specialist Crop Insurance cover is necessary. This may be difficult to obtain in Cyclone prone regions and if available may not extend to Business Interruption flowing from cyclone damage.
WATER
Dams supplying water to country areas in Australia and many other countries are drying up and those providing water to some major cities are approaching record low levels.
Rising sea levels from glacial or ice cap melt is also attributed to global warming.
Damage from rainwater, hailstorms, flood, tsunami, tidal wave, rising sea levels and even subsidence may all be considered under the heading of “water”.
A typical Industrial Special Risks Policy excludes physical loss, destruction or damage from flood, water from or action by the sea, tidal wave or high water.
The rainwater and hailstorm risk is not caught within this exclusion. This was fortunate for businesses in Canberra, ACT in Australia which were subjected to severe hailstorms in early March 2007. Car yards often suffer significant damage in these events. Other countries are far from immune. News reports indicate the space shuttle Atlantis sustained hundreds of dings from hailstones the size of golf balls at Cape Canaveral in Florida, USA, in late February 2007.
Flood is often defined as the inundation of dry land by water overflowing from the confines of any natural watercourse (whether modified or not), reservoir or dam.
Much of the damage from Hurricane Katrina was not caused by wind velocity but resulted from flood when protective water levees were breached. Problems such as this may only become exaggerated if the link between severe weather and accelerating global warming is correct.
The devastating tsunami which hit Indonesia on 26 December 2004 caused widespread damage. This would not be covered under a typical Industrial Special Risks Policy.
Cover is also unavailable for rising sea water. Whilst this may not cause significant damage to major commercial centres its impact is being felt. News reports attribute the increased incidence of flooding in countries including Hungary and Bangladesh to rising sea levels. They also report the tiny low lying Pacific Island of Tuvalu may be uninhabitable in decades due to climate change including rising sea waters. New Zealand began accepting what may be the first “climate refugees” from this Island in 2001. Venice, Italy and its ongoing battle with rising sea water may also be the result of climate change.
In April 2007 a report by the International Institute for Environment and Development advised one in eight city dwellers live in regions less than 10 metres above sea level.
The scope for property damage associated with this aspect of climate change is enormous and, as it is not insured now, it is unlikely to be covered by future insurance policies.
The absence of water can also create its own difficulties. The dry conditions being experienced in many urban centres remove moisture from the soil causing buildings to settle and crack. The Industrial Special Risks Policy deletes cover for the immediate damage caused by subsidence.
In 2006 and 2007 severe water usage restrictions have applied across much of Australia. Many industries rely on ample water supplies and the restriction of this utility may result in financial loss. The adverse impact on the swimming pool construction industry in Australia has been widely reported. Companies supplying water may also sustain a loss of profit when consumers are encouraged to use less water. In the absence of any physical damage losses such as these are unlikely to be insured.
CONCLUSION
Climate change may result in the increased magnitude and frequency of loss. A portion of this increased risk falls within current insurance wordings but many risks do not. If Insurer’s loss ratios increase it is inevitable premiums must follow. If the cost of insurance becomes prohibitive increased deductibles or restrictions to the existing insurance covers are likely.
It is unfortunate but the insurance implications of global warming may well be the least of our problems.
Author
Published with permission of Claim Solutions Pty Ltd
Insurance Policy
Country: - Australia
Policy Description: - Industrial Special Risks (ISR) Policy
Insurer: - A matter of importance for all
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