The pricing of risk by insurers helps to expose unsustainable practices and provides a crucial signal for all stakeholders in helping drive the move toward a low carbon economy, the Insurance Council of New Zealand (ICNZ) says.

ICNZ CEO Tim Grafton made the remarks during an online panel hosted by CoreLogic entitled “Moving ahead on climate change: Tackling climate risks in financial services & insurance”.

“Insurance plays a really important role in being able to provide that price to inform investment decisions that reduce risk … in order to ensure that capital is well allocated so we can transition to a low carbon economy by sending exactly the right signals,” Mr Grafton said.

“As soon as we start to hide them - if we pretend for example that coal is not a long-term issue for investment - then we’re going to go down a dark hole.”

In September, New Zealand became the first country to pass legislation requiring financial firms to declare their climate-related risks. Financial firms will now be expected to comply with a framework laid down by the Task Force on Climate-related Financial Disclosures (TCFD).

New Zealand has also established a zero Carbon Act for zero carbon by 2050. Mr Grafton says the government, Reserve Bank and international insurance prudential regulators all now have climate change as a strategic priority.

Investment and underwriting decisions “have to reflect that underlying risk of the unsustainability of investment in assets and activities that are going to create a less insurable and affordable world,” he said.

By pricing risk correctly, insurers help demonstrate where “we build in the wrong place and we don’t often build the right kind of structures which just compound and amplify the climate change problem”.

“They need to price risk in a sustainable manner,” Mr Grafton said. “By providing that risk-based signal … they are signalling to others that have a keen interest in these issues such as developers, consenting authorities.”

Insurers are increasingly declining to underwrite fossil fuel projects, with many global insurance companies ending or limiting coverage for coal projects and others also moving to restrict services in the oil and gas sectors.

Last month, Zurich reportedly halted insurance services to the Nord Stream 2 (NS2) gas pipeline, which would transport natural gas from Russia to Germany, making it the third insurance company to cut ties with the NS2.