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Institute issues model warning as climate change losses soar

Insurance losses caused by climate change have tripled since the 1980s to an inflation-adjusted average of $US50 billion ($65.7 billion) a year from $US10 billion, the Global Risk Institute says.

The figure may be much higher when indirect losses such as global supply chain disruptions are considered, and it underscores the need for investment in climate change research, including collaborative efforts with scientists, the Canadian group says.

“The ways in which the insurance industry may be affected by climate change are diverse, complex and uncertain. Consequently, the insurance industry has immense incentive to understand climate change and manage the risks associated with it.”

The industry is capable of managing climate change risks in the short term, but the future impact on catastrophe models is the big unknown.

Current models may not have adequately factored in future weather extremes.

“Over the past 20 years, catastrophe models have been extensively developed to simulate the physical characteristics of likely events and quantify their effects,” the report says.

“These models are complex and have inherent uncertainty, which will only be exacerbated by the uncertainties associated with climate change".

Current catastrophes may have been undervalued by as much as 50% if the past decade is representative of future environmental trends, the institute says, citing a study by ratings agency Standard & Poor’s.

The non-profit institute’s climate change report covers risks facing three financial institution groups – insurers, banks and pension funds. It is sponsoring two research projects, next year and in 2018, to help financial institutions understand and mitigate such risks.