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Bushfire costs to rise as winter rainfall skips Australia

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Australia faces drier conditions and an increased risk of extreme bushfires peppered with bouts of intense rainfall and floods during severe La Nina phases, representatives from Chubb and Suncorp told attendees at this year’s Actuaries Summit.

The presentation, which summarised the latest research from around 20 scientific papers, warned insurance modelling is missing key drivers of natural hazard claim costs as they fail to reflect how natural climate variability will interplay with climate change.

Natural climate variability drivers include the Indian Ocean Dipole (IOD) and Southern Annular Mode (SAM), as well as El Nino and La Nina which are determined by where the body of warm water sits in the Pacific ocean from year to year to the north east of Australia.

If the warm water gets close to Australia then moist air and more rainfall – the La Nina years – result. When the quantity of warm water sits close to South America, there is dry air to the north east of Australia and less rainfall – the El Nino years. Around half the years are “neutral” as the warm water is halfway in the middle.

“We’re projecting the warmer waters are going to be more towards South America and therefore conditions being more El Nino like. So actually what we’re looking at in future is generally drier conditions for Australia,” Chubb COO Analytics Tim Andrews said.

Scientists predict a doubling of El Ninos by 2050 but also extreme La Ninas.

“Many of the things that we see are linked to extreme episodes of the natural variability so if we’ve got more of the extremes, that would lead to more and higher claims costs going forward,” Mr Andrews said.

The natural climate variables “really complicate things like assessing the impact of climate change,” Mr Andrews says, noting that in the last ten years natural claims costs have been materially higher than in the preceding ten years.

“Is that climate change? Perhaps a quite modest component of it would be seen as climate change – maybe the larger component would be natural climate variability,” he said.

“An overarching view we have got to from having looked at the data is that the influence of natural variability on weather is so significant that any assessment of how climate change is going to impact extreme weather needs to consider how climate change will impact on natural variability,” he said.

“In any assessment we are making as insurers of climate change impacts, I think we want to be building in an assessment of how our natural climate variability is changing.”

He explained this dual influence as a gradual increase in temperatures as a result of climate change and “around that we have got variability in temperatures from year to year, and those variations are driven largely by this natural climate variability”.

“That drives a lot of what we see in terms of the climate over time,” Mr Andrews said.

Suncorp Natural Perils Senior Pricing Advisor Tatiana Potemina, who jointly presented the findings, said disclosure requirements have exceeded the capabilities of climate models “by at least a decade” as current global climate models do not have either the temporal or spatial resolution to support this mandatory reporting.

“For insurers, it’s important to understand natural climate variability because without this understanding some incorrect assumptions can be made about the trend,” she says.

“Climate change is likely to change the natural variability drivers and so what we know about how certain drivers lead to specific precipitation or temperature might change.

“The response we see in Australia might be different with climate change so it is important to continue to study how natural climate variability is going to change under the effect of climate change.”

Mr Andrews says bushfire is a good example of a peril that “may have varied in terms of its average annual cost to a material extent already,” influenced by strong positive IODs which can promote six months of very dry conditions, exacerbated by SAM which means Australia is missing winter rainfall to a greater extent.

“That’s going to continue – and we’re also being told there might be more El Nino-like conditions going forward on average and that also means dryness on much of the east coast. Clearly that is very significant for agriculture but also it is quite important in the context of bushfire costs.”