Will climate change soon make Australia “uninsurable”?

To many investors, it’s indisputable: a warming climate has caused the number and severity of natural disasters to increase. Moreover, this supposedly rising tide of devastation threatens Australians and their insurers. These claims are being repeated increasingly frequently and fervently, yet a glaring weakness accompanies them: they almost invariably lack credible – indeed, often any – supporting evidence. In contrast, I’ve analysed this country’s most authoritative source of relevant data, the Insurance Council of Australia’s Historical Catastrophe Database, and this article summarises my results.

The mainstream’s claims are baseless: in Australia since the late-1960s, natural disasters’ frequency hasn’t increased; nor has their severity. Indeed, mega-catastrophes’ normalised costs have fallen. Bluntly, there’s no increase to cause; consequently, climate change – man-made or otherwise – can’t be causing it. 

These conclusions shouldn’t surprise anyone: they parallel the Intergovernmental Panel on Climate Change’s AR5 WG1 (2014) and AR6 WG1 (2021) assessments; they also match Warren Buffett’s. Yet they’ll disconcert many and anger some investors. Once again (as during the Dot Com Bubble, etc.), they’ve allowed passion to overrule reason and drive their actions. That’s a recipe for severe disappointment (at best) and enormous misallocation, impairment and destruction of capital (at worst).

Today’s consensus

The mainstream – including insurers – increasingly regards insurance as risky. That’s because climate change is allegedly bisecting the economy into winners and losers – and insurers occupy the wrong side of a widening divide. In “Insurance Is a Climate Canary” (The Australian, 20 August 2019), for example, Alan Kohler wrote:

Last year, IAG said if global temperatures rose by four degrees, the world would become “pretty much uninsurable.” Queensland would be virtually uninsurable in a three-degree higher world ... the effects of this could be felt quite soon ... At some point soon, insurance will become expensive and hard to buy. Governments and companies need to ... through what happens if we lose the insurance industry entirely.

Despite the extreme pessimism – indeed, nihilism – of Kohler’s contention, he’s hardly a lonely voice in the wilderness. The Australian (1 December 2021) summarised the prevailing wisdom: “insurers face higher risks as climate change hits home” (see also “QBE Chief Warns of Climate Risks,” The Weekend Australian, 20-21 November 2021). On 7 October it elaborated:

risks a catastrophically expensive future, with natural disasters set to cost the country $73 billion a year by 2060. Natural disasters cost Australians $39 billion a year, but Deloitte Access Economics warned without steps to keep global warming below 3C the nation risks a massive explosion in damage.
... report warns if temperature rises are not contained Australia risks [costs of as much as $94 billion] a year from natural disasters arising from climate change ... The report warns southeast Queensland and northern NSW are the most heavily endangered parts of Australia due to a combination of worsened potential disasters including bushfires, floods and cyclones.

From these and many similar assertions, we can distil the mainstream’s two key assertions. As a result of climate change,

1. The frequency of natural disasters in Australia has been rising;
2. The cost of claims to insurers arising from these events has been increasing.

The ICA’s historical catastrophe database

“Factfulness,” wrote Hans Rosling in his book Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think (Sceptre, 2018), “is the ... habit of only carrying opinions for which you have strong supporting facts.” Such facts emerge from dispassionate analyses of reputable data. And value investors know that whenever “experts” and the herd stampede to one side of an issue, it can be instructive – and profitable – to undertake analyses that investigate alternatives. The ubiquity and increasingly adamant tone of the mainstream’s claims, plus the paucity of hard evidence that typically accompanies them and Leithner & Company’s adherence to Rosling’s adage, prompt me to ask: is the number and cost of natural disasters in Australia really increasing?

In order to answer these questions, I analysed this country’s most authoritative source of relevant data: the Insurance Council of Australia’s Historical Catastrophe Database. According to its website, the ICA’s Data Hub “collates data from multiple government agencies … on cyclone, flood, bushfire and wind exposure to over 14 million addresses in Australia. We also collect and manage the industry claim response to Natural Hazard Catastrophe Events that have occurred in Australia 1967.”

Conceptually, the definition of catastrophe is well-known and widely accepted; its application, however, isn’t obvious. How costly in terms of lives lost, property damaged and destroyed, etc., must an event be in order to qualify as a catastrophe? According to the U.S. Insurance Information Institute (III), “a catastrophe is an unusually severe natural or man-made disaster that results in potential insurance claims in excess of $25 million.” Lacking guidance from the ICA, I adopted this definition: an NHCE is (1) one of the 707 events (as of 9 December 2021) that appear on the ICA’s Historical Catastrophe Database that also (2) generated claims to insurers of at least $1.

Are natural disasters becoming more frequent in Australia?

I grouped the 302 events that meet this definition into their financial year of occurrence and summed the number of events per FY (all subsequent references to “year” mean FY). Figure 1 plots the results. At first glance, the number of NHCEs appears to be increasing over time. The average is 5.6 per year; before the mid-1990s, the annual number was usually below-average; since then, it’s mostly been above the mean, especially in 2016 (but not, it’s worth noting, in 2020 or 2021: their numbers are the lowest in almost 20 years). As a result, the trend line slopes significantly upwards – and its rate of increase is accelerating.

Figure 1: Number of Natural Hazard Catastrophe Events per Year, 1967-2021

Detailed examination of these data, however, reveals that (1) the ICA’s definition has become more lax (i.e., its threshold lower) over time; (2) using a consistent definition, the number of NHCEs per year is stable.

Table 1 provides an example. It and Figure 2-Figure 7 use “normalised” insured loss data. In order to compare apples with apples over time, these data incorporate the effects of (a) the Consumer Price Index (2017=100), (b) the number and value of new buildings, dwellings, etc., and (c) improvements in construction standards. In other words, if a firestorm identical to the one on 7 February 1967 recurred today, then, given Tasmania’s greater population, infrastructure and number of dwellings, increased cost of the reconstruction as a result of inflation, stricter building codes, etc., its insured damage (measured in 2017 dollars) would be $2.2 billion. For details, see Benjamin McAneney, et al., “Normalised Insurance Losses from Australian Natural Disasters: 1966–2017,” Environmental Hazards, vol. 18, no. 5 (April 2019), pp. 414-433.

Table 1: Comparing the Top-Six NHCEs in Two Years

Table 1 ranks (by normalised insured damage) all of the NHCEs that the ICA recorded for 1967 and the top six of the 19 that it recorded in 2016. In the more recent years, almost all (17) of the NHCEs caused less than $25m of damage (and thus by the III’s criterion didn’t qualify as catastrophes). Indeed, 12 caused less than $10m of damage. In total, these 19 events caused $825 million of damage; on average, each event cost $43 million. Did NHCEs causing less than $25m of damage occur in 1967? It’s reasonable to suppose so, but the ICA doesn’t record them. Using the same yardstick for 1967 that prevailed in 2016, I suspect that more than six NHCEs occurred in 1967.

Yet the relatively small number of NHCEs recorded in 1967 nonetheless packed a terrible punch: in total, they wreaked $11.3 billion of damage. That’s almost 14 times the total in 2016; and on average, each NHCE caused $1.9 billion of damage (an astounding 44 times the average in 2016).

In 1967 the Gold Coast’s population (72,000) was just one-tenth of today’s (710,000) and Cyclone Dinah missed it by more than 100 kilometres. If it recurred today it would wreak almost $5 billion of damage and rank among the costliest natural disasters in Australian history (Figure 6). Together with the severe hailstorm that struck the region that year, their combined normalised cost ($6.3 billion) was double that of Brisbane’s flood in 1974.  

Most tragically, the “Black Tuesday” inferno of 7 February 1967 destroyed huge swathes of Tasmania (from the Central Plateau to Hobart’s suburbs, including most of Mount Wellington, along the d’Entrecasteaux Channel and through the Derwent and Huon Valleys) – and killed 62 people, injured more than 900, destroyed an estimated 62,000 head of livestock and left more than 7,000 people homeless.

Clearly, some NHCEs are far more calamitous than others. Equally evidently, it’s easy – but flatly wrong – to assert that today’s disasters are “unprecedented.”

The key point in Table 1 generalises. Figure 2 plots the average damage per NHCE since 1967 – and corroborates my doubt that the actual (as opposed to the recorded) number of NHCEs is rising. Its mean is ca. $350 million and its trend is weakly negative. I don’t infer that NHCEs are becoming less destructive over time; rather, I infer (and will shortly confirm) that the damage they wreak is roughly constant and the ICA’s propensity to count them has risen. In other words, it didn’t record minor events in the 1960s and 1970s, but has done so since the 1990s.

Figure 2: Average Insured Damage (Normalised, Billions of $A) per Natural Hazard Catastrophe Event, 1967-2021

Figure 3, which plots the number of NHCEs per year causing less than $25 million of damage, confirms this hunch: thanks mostly to their very large number in 2016, the number of these events has increased significantly since the 1990s. McAneney et al. agree: “there has been a trend towards an increasing number of smaller events being included in the Disaster List and it might be timely that the ICA reconsiders its threshold cost for inclusion.” (Given that it included no such NHCEs in its database in 2020 and 2021, perhaps it has.)

Figure 3: Number of NHCEs, Normalised Damage < $25m, per Year, 1967-2021

As a result, the number of NHCEs per year that caused damage greater than $25 million (2017 dollars) hasn’t risen significantly – its mean is 4.0 and its weak rate of increase is decelerating (Figure 4).

Figure 4: Number of NHCEs, Normalised Damage > $25m, per Year, 1967-2021 

Are natural disasters in Australia becoming more costly?

To answer this question, I summed the normalised insured damage caused by NHCEs during each year since 1967. Figure 5 plots the results:

Over time, natural disasters’ normalised costs have clearly NOT risen. The elapse of time explains precisely none of the damage they have wrought; the series is purely random.

Figure 5: Total Insured Damage (Normalised, Billions of $A) per Year, NHCEs, 1967-2021

Financially, Australia’s worst disasters occurred in 1967 (see Table 1), 1974 (Cyclone Tracey caused $5 billion of damage and Brisbane’s flood $3.2 billion), 1989 (Newcastle earthquake, $4.2 billion), 1999 (Eastern Sydney hailstorm, $5.6 billion) and 2011 (Brisbane floods $2.1 billion; Cyclone Yasi, $1.5 billion; and two hailstorms in Melbourne whose combined damage totalled $1.6 billion).

The “Black Summer” bushfires in 2020 caused $2.3 billion of damage, and the damage incurred throughout that year totalled $4.1 billion. That’s well above the long-term average ($1.8 billion per year). Yet it’s demonstrably false to assert – as many have nonetheless done – that it’s “unprecedented.” In a long-term context, 2019 and 2020 were merely above-average and 2021 was an average year.

Thus far I’ve analysed all natural disasters that meet my definition. What about mega-disasters? Perhaps the number and severity of garden variety, run-of-the-mill NHCEs hasn’t increased, but the number of very large ones has? Figure 6 plots the 20 NHCEs in the ICA’s database that have generated the largest normalised claims, and labels the top-five.

As time has passed, mega-catastrophes’ severity hasn’t risen. Indeed, it’s mildly decreased; moreover, during the 21st  century their normalised cost has invariably been below-average. Over the years, perhaps businesses, governments and households have prepared and adapted better, and thereby mitigated these events’ destruction?

Figure 6: Australia’s Top-20 NHCEs by Insured Damage (Normalised, Billions of $A) in Chronological Order, 1967-2021

Do the large year-to-year fluctuations of total damage (standard deviation of $2.2 billion versus the mean of $1.8 billion) obscure longer-term trends? Figure 7 plots the five-year moving average; that is, the means for 1967-1971, 1968-1972, ... and 2017-2021. The trend line slopes upward, and all but two of its observations since 2009 have been above-average, yet the trend is so weak that it’s insignificant.

Figure 7: Total Insured Damage, NHCEs (Normalised, Billions of $A), Five-Year Rolling Average, 1971-2021

Today’s five-year rolling average is no higher than it was 50 years ago. More generally, Figure 5-Figure 7 plot essentially random series of data. In Australia over the past half-century, in other words, natural disasters’ normalised insured cost hasn’t risen. 

Four conclusions and implications

#1: Yet Again, the Mainstream Is Mistaken

“You can see the computer age everywhere but in the productivity statistics,” Robert Solow famously quipped in 1987 (the year he won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, usually but erroneously called “the Nobel Prize in Economics”). Analogously, these days climate change is allegedly affecting everything but the figures in the Insurance Council of Australia’s Historical Catastrophe Database.

The assertion is certainly becoming more common and strident, but the reality is clearly otherwise: over the past half-century, the frequency of natural disasters in Australia hasn’t increased; nor has their severity. Indeed, mega-catastrophes’ normalised costs have fallen. There’s no compelling or even plausible evidence that “insurers face higher risks as climate change hits home.” Bluntly, there’s simply no increase to cause; consequently, climate change – whether man-made or otherwise – can’t be causing it.

Do these results enable us to reject categorically any possibility that the frequency and severity of natural disasters is mounting? They don’t. Nor can we be certain that our conclusions will extend into the future. Equally, however, proponents of the received wisdom must be humble and honest. They cannot credibly claim – as they nonetheless routinely and emphatically do – that natural disasters’ frequency and severity are increasing, that climate change underlies these rises, and that consequently, they threaten insurers. Hard data simply doesn’t support these glib assertions; quite the contrary, they undermine them.

#2: When Will Today’s “Climate Conformity” Collapse?

Man-made or otherwise, will climate change make Australia uninsurable? I can’t see why it – or anything else, short of a nuclear war – would: ultimately, there are no prohibitive risks; there are only insufficient rates. AON, the global risk and insurance consultant, agrees. Its head of analytics told The Australian (19 March 2021) that there’s “no indication extreme weather events become uninsurable ... History shows the industry has remained adaptable to changing risk criteria and there is no reason to presume that will be any different in the future.” The implication is clear:

As it usually is when it distorts contestable hypotheses into stifling orthodoxies, the mainstream’s assertion about the frequency and severity of natural disasters is mistaken. Once again (as it did during the Dot Com Bubble, etc.), it has allowed its emotions to drive its actions.

This implication prompts the crucial question: when will the crowd come to its senses and the climate orthodoxy collapse? As The Wall Street Journal (“The Conformity Crackup of 2021,” 30 December) put it:

The year 2021 … was the year when the conformity that characterizes American politics and media was exposed for its mistakes as never before. From Covid lockdowns to the Keynesian consensus that the supply side of the economy doesn’t matter, the political-media consensus was wrong … The reason so many Americans don’t trust the media [and the “experts” they anoint] is because they’ve learned from hard experience that the consensus they are told is unassailable truth will often turn out to be false.

What, then, of the “massive explosion in damage” and the “catastrophically expensive future” that Deloitte Access Economics alleges will occur “without steps to keep global warming below 3C”? Let’s assume that it accurately estimates that natural disasters currently cost Australians $39 billion a year. Bearing in mind that predictions extending decades into the future are typically mere guesswork and often simply rubbish, let’s also assume that it accurately forecasts that natural disasters will cost the country at least $73 billion and as much as $94 billion per year by 2060.

Next, ignore its emotive words and consider some sober numbers: Deloitte Access Economics is asserting, in effect, that these costs will increase at a compound rate of 1.62%-2.28% per year over the next ca. 40 years. Stripped of publicity-grabbing scaremongering, it is (perhaps unintentionally yet plausibly) projecting that the cost of natural disasters over the next 40 years will (net of CPI, growth of GDP, etc.) remain roughly constant – just as it has over the previous half-century. Ironically, that’s exactly my position – which hardly entails a “massive explosion in damage” or a “catastrophically expensive future”!

And what about insurance companies’ CEOs’ warnings about “rising climate risks”? To understand them, we must recognise these CEOs’ motives; and to comprehend what motivates them we require the timeless wisdom of Adam Smith. In The Wealth of Nations (1776) he famously declared that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends … in some contrivance to raise prices.”

The fear of climate change butters insurers’ bread. It incentivises them to exaggerate its risks – and thereby allows them to justify sharp rises of premiums. When you receive your next renewal notice and its new (and likely higher!) cost, your insurer hopes that you’ll overlook its obvious opportunity and blatant motive – and instead blame climate change! 

#3: The Mainstream Is Mistaken Because It Misrepresents Climate Science

My findings will likely disconcert, bewilder and perhaps even anger many people. Yet they’re consistent with the assessments over the past decade of the Intergovernmental Panel on Climate Change (IPCC). The trouble isn’t just that few appear to read – never mind carefully study and dispassionately assess – its findings; fundamentally, the problem is that most people blindly accept (and an influential minority grossly exaggerates and misrepresents) them. Holman Jenkins (“The Physicist Who Became a Climate Truth Teller,” The Wall Street Journal, 23 April 2021) described the consequence:

“What the media and politicians and activists say about climate science has drifted so far out of touch with the actual reality as to be absurdly, demonstrably false.” These falsehoods, moreover, are somehow indisputable. Yet any “science” that can’t be questioned isn’t science; it’s propaganda.

Steven Koonin is well-placed to distinguish fact from fantasy. A theoretical physicist who holds a PhD from MIT, for nearly 30 years he taught at Cal Tech. He quite literally wrote the book on computational physics, and from 2009 to 2011 was Under Secretary for Science, Department of Energy, in the administration of Barack Obama. In Unsettled: What Climate Science Tells Us, What It Doesn’t, and Why It Matters (BenBella, 2021), Koonin demonstrates that much of what the public has been led to believe about climate and climate science simply ain’t so. He summarises his position thus:

The earth has warmed during the past century, partly because of natural phenomena and partly in response to growing human influences. These human influences (most importantly the accumulation of CO2 from burning fossil fuels) exert a physically small effect on the complex climate system. Unfortunately, our limited observations and understanding are insufficient to usefully quantify either how the climate will respond to human influences or how it varies naturally. However, even as human influences have increased almost five-fold since 1950 and the globe has warmed modestly, most severe weather phenomena remain within past variability. Projections of future climate and weather events rely on models demonstrably unfit for purpose (p. 24).

More specifically, “most types of extreme weather events don’t show any significant change – and some such events have actually become less common or severe – even as human influences on climate grow. In general, there are high levels of uncertainty involved in detecting trends in extreme weather. Here are some (perhaps surprising) summary statements from the IPCC’s AR5 WG1 (2014) report, indicating what we know (or don’t know) about a few such trends:”

• “…low confidence regarding the sign of trend in the magnitude and/or frequency of floods on a global scale …
• “… low confidence in a global-scale observed trend in drought or dryness (lack of rainfall) since the middle of the 20th century …
• "… low confidence in trends in small-scale severe weather phenomena such as hail and thunderstorms …
• "… low confidence in large-scale changes in the intensity of extreme extratropical cyclones since 1900 …” (pp. 97-98; italics in the original).

It’s true that AR5’s successor, AR6 WG1 (2021), often makes more confident statements about extreme weather and natural disasters. Yet it’s imperative to recognise its grave shortcomings. In particular,

1. Its confidence lacks a logical foundation. “In general,” it says, “no likelihood is attached to the scenarios assessed in this report.” That said, “the likelihood of high emission scenarios … is considered low …”
2. High-emission scenarios nonetheless dominate its text – whose overall tone is thereby quite misleading. According to Roger Pielke, high-emission scenarios comprised 31% of the mentions of all scenarios in AR5 but 42% in AR6. Bizarrely, extreme-but-doubtful scenarios underpin AR6’s more-confident statements! More realistic (in the sense that the IPCC regards them as more probable) scenarios plunged from 45% of mentions in AR5 to just 18% in AR6.
3. Even so, AR6’s assessment of the frequency and severity of cyclones, hailstorms and thunderstorms remains much the same as AR5’s. The more recent document grudgingly concedes that the detection of trends remains difficult – but neglects to add the obvious – and crucial – conclusion that an undetectable “trend” can’t be significant!

In “Climate Change Brings a Flood of Hyperbole” (The Wall Street Journal, 10 August 2021), Koonin assessed AR6:

As usual, the media and politicians are exaggerating and distorting the evidence in the report … In fact, things aren’t – and won’t be – anywhere near as dire … Most important, the model muddle continues … The complicated computer models used to project future temperature, rainfall and so on remain deficient. The latest models don’t reproduce the global climate of the past .

Refreshingly, the report deems its highest-emissions scenarios of the future unlikely, even though those are the ones you’re most likely to hear about in media reports. The more plausible scenarios have an average global temperature in 2100 about 2.5 degrees Celsius warmer than the late 1800s. The globe has already warmed 1 degree since that time, and the parties of the Paris Accord arbitrarily agreed to limit further warming to another degree. But since humanity’s well-being has improved spectacularly, even as the globe warmed during the 20th century, it is absurd to suggest that an additional degree of warming over the next century will be catastrophic. In fact, the AR5 report from 2014 says even 1.5 degrees of additional warming by 2100 will have minimal net economic impact.

Why have so many reactions to AR6 been so histrionic? Such behaviour exemplifies Koonin’s admonition: “Overwrought portrayals of a ‘climate crisis’ serve the interests of diverse players, including environmental activists, the media, politicians, scientists and scientific institutions” (p. 12). I’d add insurers, investment banks, private equity funds and “ethical” and ESG managers to this list.

#4: My Conclusion also Matches Buffett’s

My results won’t surprise Warren Buffett. That’s because they corroborate with Australian data what he has found in American and global contexts. As the founder, head and biggest shareholder of one of the world’s biggest insurers and reinsurers, his view should carry much weight – and unlike most experts, he has plenty of skin in the game. On 3 March 2014, he told CNBC:

The effects of climate change, if any, have not affected the insurance market … The public has the impression that because there’s been so much talk about climate that events of the last ten years from an insured standpoint … have been unusual. The answer is they haven’t … I love apocalyptic predictions – they will help to increase rates.

In his annual letter to Berkshire Hathaway’s shareholders (28 February 2016), Buffett added:

... Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance ... As a citizen, you may ... find climate change keeping you awake at night ... But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.

And at Berkshire’s AGM later that year, Buffett summarised his position: “We’re not denying its [climate change’s] existence. But it will not hurt our insurance business, and it’s immaterial compared to other things that could affect our insurance business.” During the past five years, Buffett’s view hasn’t changed. Like Berkshire, so too Leithner & Co: on this and all other matters we

1. consider the results of others’ sound research;
2. access reputable data, conduct our own thorough analyses and draw own prudent conclusions; and
3. act accordingly – that is, rationally, in shareholders’ interests and irrespective of others’ baseless assertions and volatile emotions.

It’s one of Buffett’s wisest adages: “be fearful when others are greedy and greedy when others are fearful.” Today’s investment mainstream’s distortion and exaggeration of climate risk suggest a corollary: distrust the crowd’s and so-called experts’ hyperbole and consider dispassionately what they emphatically reject.  

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