The impact of climate change on Private Health Insurance

When most people think of climate risk they usually focus on physical damage to property and economic effects of decarbonisation. But climate change, and the transformations which will be required to mitigate it, will affect almost every aspect of our lives in coming decades.

The issue will affect all types of financial institutions, and in this and coming climate blogs we will consider climate risk from the perspective of sectors of the industry. This blog will focus on Private Health Insurers (PHIs).

Actuaries Institute Information Note

In November the Actuaries Institute published “Climate Change – Information Note for Appointed Actuaries”, which discussed the climate-related considerations for Appointed Actuaries (AAs) preparing Financial Condition Reports. The Note specifically discusses the impacts of climate change on health, which include:

• Rising temperatures and heatwaves, which can affect both mortality and morbidity, with follow on impacts on hospital admission rates.

• Extreme weather events, which can lead to psychological distress and generate mental health related claims.

• Spread of disease, which can be impacted by changing climate conditions which can change the area where mosquitos can spread diseases such as Dengue fever.

• Poor air quality, which can be a consequence of bushfires and may lead to respiratory distress and cardiac issues.

• Stress on communities, such as those in agricultural areas in regional Australia experiencing drought. This could affect health in many ways.

The Note also touches on PHI exposure to transition risk, which includes the effects of decarbonisation on the economy. Health insurers may see changes in the demographics and job stability of communities constituting the customer base. There might also be changes in the supply chains used by health care providers, with knock on effects on cost and delivery of care. Both physical and transitional impacts such as these may stress the health care system and may prompt health insurers to adjust products, pricing, reserving, and their business models. It is clear that the Health sector is not immune to climate risk.

APRA Guidance

APRA recently published two Information Papers outlining its policy and supervision priorities for 2021.

The Policy Priorities information paper notes the importance of a strong financial system with APRA in the process of developing policies to strengthen regulated entities preparedness for periods of stress, such as climate-related financial risks. APRA is expected to release further guidance which will assist entities to develop frameworks to evaluate and monitor climate-related financial risks later in 2021.

The Supervision Priorities 2021 information paper highlights APRA’s commitment to monitoring and supporting regulated entities such as private health insurers to develop their management of climate-related financial risks by adopting a strategic and risk-based approach.

Member and Shareholder Views

The persistence of climate change reinforces the importance for health funds to assess the impact of climate change on people’s health and how this may impact the cover members require from their health insurance policy.

Private health insurers already face a great challenge in conveying the benefits of private health insurance, with insurers often blamed for high costs for health care leading to reduced participation, particularly among younger members. However, with the clear links between climate change and health, private health insurers stand to play a pivotal role in reducing the impact of climate change on health.

Releases from the World Health Organisation indicate climate change is expected to increase the number of deaths per year as a result of malnutrition, heat stress and malaria among others. Further health related issues such as cardiovascular disease from air pollution and mental health impacts from environmental degradation are examples of medical conditions that policyholders may seek coverage for under their private health insurance policy. To ensure health professionals are equipped to cope with and respond to the impacts from climate risk, health funds may choose to develop training and information sessions to increase health practitioners’ awareness of the effects of climate risk on health.

Driving a low carbon economy

There are various ways in which insurers can have a positive influence on climate, including the adoption of investment practices which support a low carbon economy. For funds currently invested in fossil fuel companies, however, it is not as simple as changing to zero fossil fuel exposure overnight. Rather, they need to develop a process which considers the impact divestment will have on the portfolios risk and return profile. An article in Insurance Business Australia from 2017 outlines HCF’s commitment to selling its shares in all fossil fuel related companies in Australia because these companies were harmful to their members. Medibank and NIB have since followed suit with similar commitments.

Health fund members have an ever-increasing awareness of climate risk and as a result some funds could potentially face reputational risk in the future owing to their decision to invest in assets such as fossil fuels. If other private health insurers commit to reducing their contribution to climate change by reducing their emission footprint this will indirectly help their members and the wider community. Small actions can have a big impact and the consequences for health funds that fail to respond to the growing threat of climate change could risk losing members. Policyholders and shareholders alike have an expectation that private health insurers will grow and adapt to the changing environment in which they operate such that they remain sustainable into the future.

The way forward

Insurance is the process of identifying and managing risk, and climate is no exception. Climate change is one of the most challenging financial risks businesses have had to address, with insurers needing to understand what impact climate change will have on their business before developing a response to combat the risk.

To date most focus has been on climate impacts on general insurers, for example rising sea levels leading to coastal flooding. However, climate risk has the potential to affect all insurance companies, including private health insurers. It is important to recognise the key role private health insurers can play in addressing climate risk.

Click here to learn more about our work in Climate Risk.

Co-authored by: Monique McLean