Banks and insurers have huge responsibility when people are buying property in a time of climate change Opinion Articles

Jun 06, 2016 - 8:30am

This article first appeared in Online Opinion on 6 June, 2016.

Kate Mackenzie
Manager, Investment and Governance

Australians are familiar with natural disasters: flood, cyclone, and drought tragedies regularly feature in our news coverage. And the evidence indicates climate change is making many of them worse. We’re lucky that most of us tend to escape with their lives intact. Our homes, though – and our investments in them - don’t always fare so well.

Residents of northern Australia discovered this the hard way when home insurance premiums rose rapidly between 2005 and 2013, mostly due to cyclone risk - some complained of fivefold rises that left them unable to afford insurance.

A subsequent Australian Government Actuary review confirmed that far North residents paid much more than their more southern counterparts and premiums had risen quickly over the past few years.

But were they being “gouged” by unscrupulous insurers? If only it were so simple. The AGA also found the size of payouts for cyclone damage was escalating. Between 2005-06 and 2012-13, insurers had paid out $1.40 to their customers for every $1 they’d received in premiums. No business can tolerate that sort of loss for long.

Though the influence of climate change on cyclones is hard to identify, it’s broadly expected we will see more severe cyclones – and they will move further south. We also know that other hazards such as coastal erosion, bushfire, intense rainfall and storm surges are all likely to become increasingly problematic in the coming decades. You’d think, at the very least, we’d avoid building housing – and approving mortgages - in areas vulnerable to climate and climate change impacts. But a messy interaction of local, state and federal government policies has continued to enable risky developments.

For example, a development application for residential apartments in the floodplains of the Gold Coast suburb of Carrara was approved in 2013 -- with the proviso that it include a helipad, two evacuation boats, and three days’ worth of safe water supplies for 80 per cent of the residents. The council’s reasoning for such an extraordinary decision was that rejecting the development application outright may have been costly to defend.

Many people are unaware of their exposure to evolving hazards such as coastal erosion, and even historical flood information is limited in some areas.

It’s a familiar theme in recent reviews of natural disasters: home-owners too often don’t realise the risk until their insurance premium rises suddenly, or even until disaster actually strikes.

There are many examples of policymakers and the private sector trying to address this problem – raise awareness, change policies, ensure that homes are built in safer places and to safer standards. Insurers, investors, and some of the larger property developers have participated in such efforts. However one stakeholder that has been relatively quiet is the banks.

In Australia, banks require you to have home insurance before approving a mortgage. Yet they do not check, in subsequent years, whether you are still insured.

Our research identified only one example of the banking sector formally addressing their role in relation to housing at risk of extreme weather. In response to a government issues paper following the 2011 floods, banks denied they were at risk themselves, or should play a part in reducing risk through means such as annually checking insurance coverage of mortgagors.

Yet, in climate-related disclosure statements, most big banks acknowledge risk from increasing natural disasters due to climate change affecting their mortgage books. In recent years, some have had to provision for bad debts related to big floods. So far these have been small amounts, but as natural disasters become more problematic, will that always be the case?

The last thing anyone wants is a sudden plunge in house prices in a particular region. Yet it seems inevitable that some housing in vulnerable areas will be repriced. There is anecdotal evidence of this happening already in North Queensland.

To avoid hardship and loss to individuals, we need a concerted effort from all levels of government and all private sector stakeholders, to address the problem.

This is where banks come in. They are an unrivalled player in our economy – constituting the biggest sector of the share market. The big four banks hold about 80 per cent of all mortgages – and their relationships tend to last many years, allowing plenty of opportunity to inform their customers.

There is also a social responsibility dimension to the banks’ roles. Contrary to what you might think, not all these exposed home-owners are the wealthy owners of sea-fronted mansions. A big bank might be able to write off a $70 million loss here or there when a flood or other hazard strikes. Individual Australians aren’t so lucky if their single biggest asset takes a hit.

It’s time banks began integrating climate-related risk into their assessment processes - to make good, responsible decisions when granting mortgages and especially financing property developments. As lenders for property purchases, they have the potential to press for good public policy in this regard -- and to work towards a good outcome together with stakeholders from civil society and from other parts of the private sector.

Buying and owning a home in a world of climate change heightens the responsibilities of all related players - banks, insurers and governments - at all levels. All play a crucial role. All need to lift their game.

Kate Mackenzie is The Climate Institute’s Investment and Governance Policy Manager and author of its new ‘There goes the neighbourhood: Climate change, Australian housing and the financial sector’ report.

Kate Mackenzie

Kate is Investment & Governance Manager at The Climate Institute. Prior to joining the Institute in 2014, she worked primarily as a financial journalist, winning awards for her work at the Financial Times and the Australian. Earlier, she was a technology and business reporter for the Australian, and online editor of Australian IT. Kate is a veteran of new media, and was one of the first online journalists to be hired by the ABC in the late 1990s.

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