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* 'Once-in-500-year' floods, fires now more frequent
* Concern physical assets may become uninsurable
* In flood aftermath, insurers bail, banks still lend
By Swati Pandey, Carolyn Cohn and Simon Jessop
SYDNEY/LONDON, March 15 (Reuters) - Only a year after losing
their homes to floods in parts of Australia's north eastern
coast of Queensland, people are moving into new houses built on
or near the same plots.
But while banks have been only too willing to offer them
long-term loans at rates in line with the national average,
insurance companies, who suffered insured losses of A$1.24
billion ($820 million) as a result of the Townsville floods, are
more cautious.
A tradesman who has bought a new home in Townsville after
walking away from his water-damaged dwelling 15 kilometres (9.32
miles) away, said the insurance premium had risen 350%, a price
he was not willing to pay to protect against another flood.
"Locals call this place 'Brownsville', that's how dry this
place was. So it is unfair for insurers to react in such an
extreme manner after just one event. This was a
once-in-a-500-year flood, it won't come again in my lifetime,"
the tradesman, who would only be identified by his surname
Cullen, said.
Banks appear to be taking a similar view, with long-term
funding still widely available for new and existing housing,
while insurers are more picky.
Allianz, for example, has become more selective
about writing new policies in Townsville, brokers said, while
others including Suncorp and QBE stopped
covering large apartment units after the Queensland floods.
The insurers agree that the floods were previously a
1-in-500-year event, but say climate change has made such events
more frequent.
That divergence is echoed across regions in developed
countries which have been hit by floods, forest fires or other
extreme weather-related events linked to climate change and is
worrying regulators and industry executives.
They fear banks are building up portfolios of long-term
loans against construction projects, infrastructure and real
estate that are becoming uninsurable.
Extreme weather could depress property prices and leave
banks exposed to defaults on home loans or large commercial
projects. Without insurance, owners may be unable to afford the
cost of maintaining their properties.
Among those most concerned is Larry Fink, boss of the
world's largest investor, BlackRock, who warned in his
annual letter to company boards in January about the risks to
banks if insurance dries up. Fink said banks may no
longer be able to offer 30-year mortgages, which he described as
"a key building block of finance", if fire or flood insurance
are not available.
In Italy, insurers refuse to provide flood coverage to
Venice, where flooding is a regular occurrence and has been
getting worse due to climate change.
During the Townsville floods, the hit to banks was less
marked and as insurers depart, new housing developments continue
to spring up, backed by the country's major banks.
"As a banker we have a presumption with our customer that
insurance will generally be available and affordable. That's
changing," said Mathew Murphy, head of social & environmental
risk at Australian and New Zealand Banking Group.
"What has changed is the awareness and emergence of
potentially more severe climate damage, be it storm, fire or
other climate danger," he added.
'TRICKY'
The potentially dangerous divergence between the approach
taken by banks and insurers over housing and climate change has
been flagged at the highest levels of finance.
While banks around the globe are starting to do more to
understand the risks, the pace of change is slow.
Bank of England governor Mark Carney is among those pushing
for financial services firms to better understand and be more
transparent about climate risk and plans to mitigate it.
While banks did better than many other sectors in some areas
on how climate risk impacts their business, a 2019 assessment by
the Task Force on Climate-related Financial Disclosures (TCFD
found just 20% reported on the resilience of their strategy.
For details of TCFD's 2019 Status Report, click here https://tmsnrt.rs/38HFEmH
and here https://tmsnrt.rs/2vWJieZ. To read the full report,
click here
https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-St
atus-Report-FINAL-053119.pdf.
Insurers are ahead when it comes to modelling risk, with
teams of scientists and hundreds of years of data to call on,
but climate change represents uncharted waters.
Australia is following the BoE's lead with plans to
stress-test banks and insurers on climate risk, as regulators
fret that rare natural disasters become commonplace.
"We are discussing this with the banks. But do we have a
solution yet? That's where things get tricky," a person directly
involved in discussions between Australian banks and insurers
said.
While developing markets have always suffered from a lack of
insurance, the problem is now expanding in developed ones.
In California, which has suffered devastating wildfires in
recent years, the regulator said that areas affected in 2015 and
2017 saw a 10% increase in insurance non-renewals in 2018.
The regulator issued a mandatory one-year moratorium on
insurers failing to renew policies in wildfire disaster areas in
December 2019. And to raise money to protect properties against
climate risk, the state is planning to launch a resilience bond.
Although some U.S. banks are now more cautious about being
over-exposed to climate-change affected areas, they have not
backed away from flood-prone states like Florida or California.
But in hurricane-prone states like Texas and Florida,
investors are betting against the U.S. residential mortgage bond
market, because they say outdated flood maps mean insufficient
homeowners are buying flood insurance.
"I can no longer trust my history - weather patterns have
fundamentally changed," Zurich Insurance Group's Chief Risk
Officer Peter Giger told an industry event in January.
BAD LOANS CALM
A year on from the Townsville disaster, one reason banks are
happy to lend is that while the proportion of customers who were
more than 30 days behind on their mortgage rose from 2% to 2.3%
after the floods, it soon dropped back to 1.9%.
Banks have also been helped by support from the local and
federal government, and they are often willing to postpone some
repayments to help borrowers get back on their feet.
While these measures have worked so far, policymakers are
concerned about the potential for persistent floods and fires to
spur large-scale migration, triggering a surge in bad loans.
Deadly bushfires in parts of New South Wales in late
December have underlined the scale of Australia's problem.
The number of loans in arrears is expected to balloon as the
inferno disrupted the peak holiday season, hitting consumer
spending, destroying thousands of homes and killing 33 people.
Ratings agency Moody's warned that more frequent and severe
natural disasters highlighted growing risks to the credit
quality of Australia's A$1.8 trillion residential mortgage
portfolio, the biggest source of revenue for the nation's banks.
And the fires have cost insurers more than A$5 billion.
Mortgage brokers in Queensland state said that banks can
insist on more documentation in high-risk postcodes, including
evidence of insurance prior to agreeing a loan, but the rigour
with which they enforce the rules is patchy.
Commonwealth Bank of Australia, the largest mortgage lender,
declined to comment. National Australia Bank said it
mostly focused on a borrower's capacity to service and repay a
loan, while Westpac said it had "standard credit controls".
All declined to say whether or not they had shrunk their
loan book in high-risk zones as a result of the losses.
The long-term forecast for Australia is not good, with
insurer IAG predicting that climate change could "start to
render existing housing stock uninsurable".
($1 = 1.5115 Australian dollars)
(Additional reporting by Maya Nikolaeva in Paris, Lauren
LaCapra and Suzanne Barlyn in New York and Nina Chestney in
London; Editing by Alexander Smith)
