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Australia’s unique approach to understanding natural disaster risks

Five of Australia’s six most costly natural hazard events have come from different perils: a tropical cyclone, an earthquake, a flood, bushfire and a convective storm. Over the last 20 years, a unique approach to understanding these risks has developed in Australia through a close relationship between the insurance and academic sectors. And by doing so Australia has been at the cutting edge in applying advances in technology and science to the benefit of the broader community. Here we explore a little of this history and explain how it has helped communities and emergency services better manage the risks they face.

The early players in the catastrophe loss modelling space set up shop in the late 1980s in America, but it was not until Hurricane Andrew made landfall in Florida in 1992 that the true power of such modelling was recognised. Approaches to pricing natural hazard risks at the time relied very much on the proverbial rate maker’s moistened finger in the air and recent experience. The errors in this approach had not been exposed because the previous 20 years had been relatively benign with no intense hurricanes making landfall and afflicting areas of high exposure.

Missing from the traditional approach was the bringing together of the science of the hazard with a geospatial understanding of assets and the structural weaknesses of buildings together with insurance policy conditions. Natural catastrophe loss models, while primitive by today’s standards, did just this.

Within hours of Hurricane Andrew making landfall, modelling pioneer Karen Clarke forecast Andrew’s insurance losses to be in excess of $13 billion, way more than Lloyds of London’s estimate of $6 billion. Several months later when the final loss emerged at $15.5 billion, eleven insurance companies had gone bust. Clarke’s early estimate of losses after Andrew had proven robust and the utility of catastrophe models fully apparent.

Meanwhile, on the other side of the world, farsighted individuals in the insurance sector in Australia also saw the benefits of catastrophe modelling, but were well aware that interests in the larger exposures of Europe, America and Japan would capture this development. Australia needed its own R&D capability.

With this in mind, parties in the insurance sector in Australia reached out to the academic sector to see if there was interest in developing an independent research centre in the natural hazards space. Macquarie University Professor Russell Blong answered this call and the start of a unique partnership between industry and academia was spawned.

Investigating the October 2013 Blue Mountain bushfires.

Investigating the October 2013 Blue Mountain bushfires.

Risk Frontiers, born in 1994 under Russell’s leadership, is now the longest running natural hazards research centre in the country. It was initially funded by a group of sponsor companies, which provided seed capital in the form of sponsorship and included insurance, reinsurance and reinsurance broking companies. Representatives of these companies provided an advisory board that still exists to this day and which helps set Risk Frontiers’ research agenda. Much of that agenda today is devoted to improving the management of natural hazard risks including a significant commitment to risk communication.

While its business model has changed somewhat over its 21-year history, Risk Frontiers has developed into an independent, self-funded, not–for-profit R&D company under the stewardship of Professor John McAneney. It continues to thrive despite the differing incentive structure of academics and the commercial business interests of the insurance sector. These two groups have been brought together under their common desire to better understand risk and solve interesting and complex practical problems. And in doing so, Risk Frontiers is well on its way to becoming the most credible independent source of risk knowledge, products and services in the natural disaster space, across Asia Pacific.

While the insurance sector still remains a core focus of many of the activities at Risk Frontiers, its multidisciplinary team increasingly works closely with government, disaster management agencies, and supports international efforts to help manage disaster risks and improve the safety of communities.

Following the October 2013 Blue Mountains bushfires in New South Wales (NSW), Australia, Fire and Rescue NSW was given significant funding by the government to implement findings from Risk Frontiers’ research into how communications between official sources and local residents could be improved upon. Several staff served as expert witnesses to the Royal Commission into the 2009 Victorian bushfires. The team has also made invited contributions to other key inquiries such as that into the 2010 Queensland floods, the Productivity Commission’s review into funding natural disasters and the role of government in the provision of natural catastrophe insurance.

Risk Frontiers continues to provide thought leadership on topics ranging from the potential for improved building codes and land use planning guidelines to reduce risk. It has research interests in risk communication, the detection of global climate change signals in loss data, post-disaster event investigations and estimating the economic costs of natural disasters. It is helping emergency service agencies in the development of natural disaster planning and risk management plans. Risk Frontiers has always had a strong focus on communities and continues to work with Government agencies to assist them to better understand how to effectively engage with communities. It also collaborates closely with other research institutions including the Australian Bushfire and Natural Hazards Cooperative Research Centre.

Risk Frontiers has a proud history of developing early career researchers and post-doctorial candidates in an applied science setting. These students learn to solve real world problems from day one, often at the interface between science and business, or science and emergency management. This unique research centre has served Australia remarkably well and is set to continue to expand on this legacy of achievement as the world faces new challenges in a warming climate as well as the current threats from natural and man-made risks.

For more information, go to www.riskfrontiers.com

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Kevin Roche is the Chief Financial Officer and Principal Economist at Risk Frontiers, a natural hazard research centre based at Macquarie University in Sydney.