Climate-related Risks and Opportunities for Private Health Insurance

Date21st December 2023

Climate policy is changing the regulatory environment for everyone, including Australian Private Health Insurance (PHI) funds. The forthcoming mandatory requirements in Australia from FY25 onwards have prompted disclosing entities to start developing climate-related scenarios to test their climate resilience and identify risks and opportunities (see exposure draft for Australian Sustainability Reporting Standards). APRA previously urged companies, including PHI funds, to integrate climate-related risks into their comprehensive risk management frameworks (CPG229 Climate Change Financial Risks).

According to the exposure draft, entities will need to disclose material information about the climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. Therefore, PHI funds need to be aware of the effects of climate change on health, as discussed in a prior blog here, particularly on elective healthcare.

So, what are the climate-related risks and opportunities for PHI funds in terms of claims cost, mental health, PHI membership, and the operating environment?

How will climate impact claims cost?

PHI companies are at risk of increased claims inflation due to rising severity of extreme weather events and higher input costs. Recent data from the Australian Institute of Health and Welfare indicates a notable increase in hospitalisations linked to extreme weather events, predominantly caused by severe heat. This data may underestimate the true impact on injuries and fatalities requiring hospitalisation, as it focuses solely on admissions, which does not capture chronic disease impacts or acute problems that are resolved outside of hospital.

Extreme weather is leading to more injury hospitalisations, with heat being the main cause [1]

Rising temperatures strain the circulatory system as it works harder to cool the body down, particularly for patients with a compromised system. This additional stress particularly affects vulnerable populations, such as the elderly, pregnant women, and those with chronic diseases, contributing to extended hospital stays, increased medicine usage, and more visits to health services. These factors collectively contribute to high claims cost.

Over the short term, these effects may be limited due to current hospital contracting agreements. However, over a longer period claims cost will increase as longer hospital stays are required with more patient co-morbidities. These long-term chronic impacts will increase the need and cost of elective procedures. For example, a member who needs a hip replacement may need to be hospitalised for longer if their respiratory function is compromised. A study found that adverse pregnancy outcomes due to air pollution and heat can also predispose newborns to health problems, including necrotising enterocolitis – a condition causing inflammation of the intestine with a mortality rate as high as 50% [2].

5.3% of healthcare costs related to heat in Perth were borne by the Private Health sector

Additional burdens on health services through climate change will have a flow-on impact onto the private health system. One study [3] estimated that 5.3% of healthcare costs related to heat in Perth were borne by the private sector, foreshadowing a potential increase in private healthcare costs for heat-related illnesses.

The aftermath of the COVID-19 pandemic further underscores these challenges. Non-urgent and semi-urgent elective surgeries were suspended multiple times between 2020 and 2022, leading to increased public surgeries contracted to NSW private hospitals. Hospitals are still dealing with issues arising from three years of the COVID-19 pandemic [4]. Private hospitals and PHI funds should learn from this experience and consider ways climate risk could cause similar stress on the public system.

How will climate impact mental health?

"Access to timely mental health treatment is critical and this is one of the main drivers of growth in PHI. Mental health is now the top reason members under the age of 59 are going to the hospital" [5]

Private Healthcare Australia, 2023

The Australian and State and Territory governments' expenditure on mental health has been increasing, with PHI funds funding 5% of the expenditure [6]. Exposure to extreme weather events can result in psychological distress which needs direct intervention. This risk is not a hypothetical; Australian research has identified an increase in suicide risk for men who live in rural farming communities in times of prolonged drought [7].

It is likely that PHI claims for mental health will increase, and with the mental health waiver, costs can increase with little notice. One possible offset is an opportunity to grow membership and ensure timely access to required services.

How climate impacts our people and PHI membership

Natural disasters have significant economic impacts on Australia, including property damage, infrastructure risks, and financial instability. The 2019-2020 Black Summer bushfires alone resulted in substantial macroeconomic and labour market impacts. The aftermath included a loss of 29,600 FTE jobs, $10.2bn in real GDP, and $6.1bn in household consumption [8]. Similarly, the 2013-2014 heatwaves led to a loss of productivity amounting to AU$7bn [9].

Economic pressure can cause Australians to re-evaluate their needs for PHI as it puts pressure on insurance affordability, which is a long-term structural challenge for the PHI industry [10]. This potentially leads to an increased morbidity profile among health fund members, as healthier individuals are more likely to terminate their insurance. Such a cycle can elevate drawing rates and prices.

Australians increasingly prioritise providers that align with their values, prompting insurers to scrutinise their environmental impact. 81% of Australians expect brands to be socially responsible, with 51% noting that climate change is a key issue that companies should address [11]. This creates an opportunity for PHI funds: Funds that genuinely and proactively act on climate change could gain a valuable sales advantage, particularly with younger Australians.

How climate policy is impacting the operating environment

Australia's commitment to achieving net-zero emissions by 2050 and reducing greenhouse gas emissions by 43% below 2005 levels by 2030 will impact hospital investments and spending, including investment in new technology, to achieve their own net-zero targets. Such changes would be passed along to health insurers through hospital cost agreements, which can affect healthcare costs for PHI funds in the short term. In the longer term, however, health co-benefits of mitigation actions may be realised through lower air pollution levels, increased physical activity and plant-based diets [12].

Getting proactive on climate change

Climate change is an issue that no industry can afford to ignore, and the PHI sector is no exception. PHI funds should understand how climate change is shaping the health needs of their members, particularly when it comes to elective healthcare services. By proactively addressing the direct and indirect impacts of climate change on health, investing in resilience measures, and incorporating climate change considerations into their strategic planning, insurers can help ensure the ongoing well-being of Australians in a rapidly changing world.

Finity’s Climate, Perils, and Economics Advisory practices have experience in assisting insurers, banks, and other organisations to identify, understand and disclose climate-related physical and transition risks. Depending on where you are on your climate journey, we can support you with qualitative and/or quantitative analysis, engagement and prioritisation of physical and transition related risks and opportunities. We can work with you on the upcoming requirements to disclose climate-related risks under the ASRS and to integrate climate risk into your organisation’s decision-making, product development, and enterprise risk management framework.

In our next blog, we will break these down into steps you can take to measure and manage climate-related risks and disclosures.

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[1] Australian Institute of Health and Welfare (AIHW). (2023). Extreme weather is leading to more injury hospitalisations, with heat being the main cause.

[2] Sun, S., Weinberger, KR., Spangler, KR., Eliot, MN., Braun, JM., Wellenius, GA. (2019). Ambient temperature and preterm birth: A retrospective study of 32 million U.S. singleton births.

[3] Tong, M. X., et al. (2021). Hospital healthcare costs attributable to heat and future estimations in the context of climate change in Perth, Western Australia. Advances in Climate Change Research, 12(5).

[4] Bureau of Health Information. (2023). New South Wales and the COVID-19 pandemic from 2020 to 2022, Healthcare in Focus.

[5] Private Healthcare Australia. (2023). PHI membership at all time high but inflation and overpriced medical devices threaten affordability.

[6] Australian Institute of Health and Welfare (AIHW). (2021). Expenditure on mental health-related services.

[7] Hanigan, IC, Butler, CD, Kokic, PN, Hutchinson, MF. (2012). Suicide and drought in New South Wales, Australia, 1970-2007.

[8] Wittwater, G., & Waschik, R. (2021). Estimating the economic impacts of the 2017-2019 drought and 2019-2020 bushfires on regional NSW and the rest of Australia. Aust J Agric Resour Econ, 918-936.

[9] Zander, KK, Botzen, WJW, Oppermann, E, Kjellstrom, T & Garnett, ST. (2015). Heat stress causes substantial labour productivity loss in Australia. Nature Climate Change, 5, 647.

[10] APRA. (2023). APRA Executive Board Member Suzanne Smith - Members Health Directors' Professional Development Program.

[11] Nine and FiftyFive5. (2022). 80% of Australians want Brands to use their Power for Real World Change.

[12] Doctors for the Environment Australia (DEA). (2020). Net zero carbon emissions: responsibilities, pathways and opportunities for Australia’s healthcare sector.