From floods to fire – El Niño is here

After months of speculation, Australia is officially in an El Niño event.

The Bureau of Meteorology (BoM) made the long-awaited decision, after a La Niña pattern brought three years of cool temperatures and record-breaking rain.  During this period, the 2022 floods in South‑East Queensland and NSW were the costliest natural disaster for insurance costs in Australian history. As of June 2023, the ICA estimates the February‑March 2022 floods in South‑East Queensland and NSW have caused $5.87 billion in insured damages.

What is El Niño and how is it different to La Niña?

The cycle of La Niña and El Niño – known as ENSO, or the El Niño-Southern Oscillation index – works rather like a pendulum.

La Niña occurs when water in the eastern tropical region of the Pacific Ocean is cooler than average as the “trade winds” – the planet’s prevailing east-to-west winds – strengthen, creating warmer-than-normal water around Indonesia and Australia’s east coast.

This leads to increased rainfall and brings the risk of heavy flooding in Australia. However, when those conditions are reversed – trade winds are weaker, and water is warmer than average in the eastern tropical Pacific but cooler close to Australia – an El Niño is declared. The prevailing conditions are hot and dry with the threat of drought and the likelihood of bushfires.

Implications for the property insurance market

Policyholders with assets located in ‘bushfire prone areas’ are likely to face an insurance market less likely to insure those properties. Insurers have started to decline to renew property risk located in outer regional or remote locations.

An El Niño event will increase the chances of record-high temperatures and extreme weather patterns over the next 12 months, particularly in eastern Australia. It is Australia’s first El Niño event in eight years.

Property insurers’ focus is now quick to shift risk assessment from “floods” to “fire” exposure. Some of the country’s most severe bushfire events occurred in the last El Niño cycle. The hottest and driest year on record in Australia was 2019, which was a declared El Nino event. The coinciding 2019 bushfires in NSW, Queensland, Victoria and South Australia still remains within the top five insurance catastrophes, with claims totalling $2.32 billion with nearly 39,000 claims lodged.

Preparing for renewal

If you are a business or property owner seeking insurance in a bushfire prone area, you should take time to invest in proactive risk management strategy. It is important that you can demonstrate these initiatives to interested insurers.

Consider the following:
  1. Take steps to ensure that your property is well protected. Bushfire losses occur through both direct fire, smoke damage or denial of access. Consider how you can manage these exposures.

  2. Make sure fire prevention strategies are reviewed. It is critical that testing of fire equipment (alarms, sprinklers, extinguishers, water pressure and boosters, etc) has been undertaken by an independent third party.

  3. Demonstrate your risk management approach and documented fire plan. Considerations include the following:

    • How will you stay informed about warnings and updates?

    • Which Fire Danger Rating is your trigger to leave?

    • At what point will you commence your evacuation fire plan?

  4. Make sure your asset registers and values are updated to avoid consequences of underinsurance.

  5. It is important to start the renewal process early. Given the market trend in respect of bushfire risk, it will be likely that insurers will insist on risk surveys. Those surveys will have strong regard to bushfire exposure. In order to have surveys completed and attend to the risk recommendations in reports, policyholders should give themselves plenty of time.

The Team at Bellrock exists to do risk differently. We utilise our panel of third-party experts to assist our clients to identify, mitigate and transfer exposure to loss. We would strongly recommend property owners consult with a member of our Team to discuss how our unique methodology can assist you to minimise the impact that bushfire risk will likely have on insurance premiums.

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