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Bushfire-hit insurers ‘pulling plug on energy assets’

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Energy companies are struggling to afford insurance for their infrastructure after a jump in premiums since the recent bushfires, according to Energy Networks Australia.

The energy providers’ national industry body told the Royal Commission into National Natural Disaster Arrangements that the availability of insurance cover in high-risk areas has become increasingly difficult, and the higher costs may flow through to consumers.

In a submission to the royal commission, they say they have been notified of the likely “complete withdrawal” of insurance lines in future years.

Within 12 months at least eight specialist insurers have either pulled out of, or drastically reduced capacity on bushfire risks, Energy Networks Australia says, and any new capacity being offered is at much higher prices, making it more difficult and costly to obtain the same level of cover as previously.

“Insurers are becoming more reluctant to insure network assets,” the body’s GM Networks, Jill Cainey, says.

“If those costs go up, then those costs may flow through to consumers, and broadly I would imagine that insurance in high-risk areas will become increasingly difficult,” she told the royal commission.

Australia’s energy networks comprise the transmission towers, substations, poles, wires and pipes which supply gas and electricity to almost every household and business in the country, representing 11 million electricity customer connections and 5 million gas connections.

The submission, made by CEO Andrew Dillon, notes that both the local and global insurance markets have experienced significant loss claims activity in recent years, driven by an increasing number of natural catastrophes.

“It is expected with extreme climate conditions and more insurance losses, premiums will further increase into the future and the insurance capacity market will reduce as insurers continue to exit the market,” Mr Dillon says.

“These developments have the significant potential to impact the risks and costs borne by current and future electricity customers.”

Electricity network risks and the potential volatility of claims are more complex and usually of a larger scope then general insurance risks, and are often underwritten by specialist insurers. Energy Networks Australia members typically source insurance from a combination of London and Australian insurers, with some members sourcing capacity in China.

The submission notes the global insurance industry is seeing an increase in catastrophe events, resulting in significant insurance claims and payouts and many insurance providers are facing larger than expected financial losses.

Population density growth, more frequent extreme-heat days, low rainfall figures and an ongoing trend of longer bushfire seasons are also contributing to the likelihood that the cost of energy network insurance will rise substantially over time, the submission says.

It calls for a renewed focus on ensuring efficient risk allocation for customers, the adequacy of existing regulation, and flexibility to develop alternative ways of managing the balance of associated risks and costs in the long-term interest of customers.