When Adam Bailey last sought insurance for his antiques shop in Lismore, nobody would offer cover except one firm that demanded $70,000 a year.
The shop with its 150 year-old Japanese kites and rare jewellery was “like a museum” but Bailey and his other neighbours balked at paying out such premiums. After this week’s flood topped previous flood heights by 2 metres, Bailey is facing half a million dollars of uninsured losses.
“It’s still under water,” Bailey said on Wednesday, still unable to visit the shop. “We’re used to floods but nobody can deal with this,” he added. “I struggle to believe Lismore will survive this one.”
Insurers are in the early stages of assessing the insured damages from the ongoing floods in northern New South Wales and Queensland. On Wednesday, the “rain bomb” looked set to include regions in and around Sydney.
The insurance industry continues to count the cost of this week’s ongoing floods, with more damage expected in the central NSW region and Sydney. As of Wednesday, claims had reached 48,220, up by half in a day.
The latest weather-related catastrophe reveals the scope of the perils Australia faces, particularly for residents in vulnerable communities like Lismore, insurance and climate experts said.
While insurers are demanding more money be spent on boosting the resilience of communities to a heating climate, in some cases the response should be to encourage people to live elsewhere, they said.
“As the climate changes, and the weather becomes more extreme, I think we’ll have to accept that in some places you just can’t treat the risk [by adaptation],” said Tom Davies, an insurance consultant who helped lead the Insurance Council of Australia’s climate strategy until December. “We’ll have to retreat.”
The industry last month released its resilience report, appealing for the federal government to double annual spending to $200m to mitigate against disasters, and for states to match the increase. The money would go on building levees, strengthening bridges and other projects to limit damage, saving on recovery costs and keeping insurance premiums lower in the process.
Davies, who co-founded consultancy Edge Environment, said authorities need to update building and planning codes that were developed for a stable climate that no longer existed as extremes worsen on a warming planet. Premiums would rise in many vulnerable communities, prompting more people to ditch insurance.
“We can’t keep on putting houses in an area that’s set to a one-on-100 year flood height,” Davies said.
He cited the Hawkesbury-Nepean floodplain to Sydney’s north and west, a region known to be flood prone but where planners continue to allow new housing developments.
“You’ve got to stop putting homes in harm’s way … which is difficult because in particular, there’s a lot of pressure on land [development as] we need more homes,” Davies said.
The director of the Australian Research Council’s centre of excellence for climate Extremes, Andy Pitman, said Australian settlements – along with many other places – were built close to rivers or the coast, or both, leaving them exposed to intense weather events.
“If you think about where risk is magnified, it’s exactly those places,” he said. “So an awful lot of our settlements around the world are actually designed to be close to the things that bring the risk, which is awkward, really.”
Pitman said insurance companies typically don’t insure against events that they know will occur. “They’re in the business of gambling,” he added. “They gamble that you’ll pay your premium and that they won’t pay out.”
The climate crisis, though, was “weighting the odds” in ways that would discourage insurers from offering cover for certain events, particularly flooding and cyclone-related damage.
In a bid to stem the exit of insurers from northern Australia, the Morrison government last month said it had finished the design of a $10bn reinsurance pool that will begin operations in July.
More than 880,000 residential, strata and small business property owners are forecast to get premium discounts of as much as 58%, saving almost $3bn over 1o years, the government said.
Insurers welcomed the move even as they predicted perils will increase.
“Our research and data tell us that we’re going to see more intense extreme weather events, particularly in northern Australia, and the Cyclone Reinsurance Pool will play an important role in helping to prepare and protect people and communities,” said Nick Hawkins, IAG’s managing director and chief executive.
However a senior adviser to the government, who requested anonymity, said a similar intervention in the US to fill an insurance void in hurricane-threatened areas ended up leaving billions of dollars of debt for the government. People were also encouraged to add rather than reduce their exposure to the threats.
“It’s the opposite signal that you want to end up sending,” the adviser said.
Davies agreed “they’re basically weakening the signal of an insurance premium”, while Pitman said insurers were better equipped than governments to assess perils.
“Insurance companies deeply understand risk because their viability depends on that, and governments don’t,” Pitman said. “It’s very dangerous.”
Governments might also be tempted to intervene to support communities such as Lismore, but the town’s levee was built only to withstand a one-in-10 year flood, and even that flood level was based on historical records.
Any levee that would protect Lismore against one-in-a-century floods “was like putting the Berlin Wall through the city [which] was completely untenable to the people who live there”, Pitman said.
Managing director of Risk Frontiers, Andrew Gissing, said the Wilsons River flood has a 0.2% chance in any year, a calculation usually expressed as a one-in-500-year event.
S&P Global Ratings put an early estimate of the extreme flooding as a $1bn-plus insurance event.
“This exposure could increase to $2b with ongoing Brisbane River inundation in urban areas and as the storm cell moves further into NSW,” S&P said. “This would place the insurance exposure alongside that of Australia’s largest flood events.”
The January 2011 floods in Brisbane cost a normalised $2.1b, while the city’s 1974 floods is put at $3.2b.
