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Insurers raising their game on climate risks

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A regulator’s survey shows general insurers are increasing their understanding of and response to financial risks from climate change, while most life insurers are sitting idle on the threat.

The Australian Prudential Regulation Authority’s (APRA) first such survey of the financial sector exposes a sharp disparity between the two sectors.

All general insurers are taking steps to improve their understanding of climate risks. Half consider climate risks to be material now, about 35% think they will be material in the future and only 15% think they will not or are unsure.

Risks include extreme weather, changes in technology, policy and social adaption, plus regulatory enforcement and litigation.

Most general insurers rate floods in their top two physical climate risks.

Some foreign-owned general insurers are following their parent companies by developing governance frameworks to deal with climate risks, the survey reveals.

They are also hiring specialists, improving training, conducting scenario analysis and updating catastrophe models.

But only 40% of life insurers are acting to increase their understanding of climate risks, and no life insurers are undertaking financial analyses of the risks (against 70% of general insurers) or scenario analyses.

And about 80% of life insurers think climate risks are not material now but may be in the future.

General insurers are seizing opportunities created by climate risks through new products such as parametric insurance, which responds to pre-defined triggers, simplifying claims.

APRA plans to increase supervision of companies’ management of financial risks from climate change, which it wants assessed within prudential risk management standards.

“It is imprudent for entities or regulators to ignore such risks just because there is uncertainty, or even controversy, about the policy outlook,” the regulator says.

It also warns companies to move from increasing awareness to taking mitigating action.

“The world is rapidly transitioning to a low-carbon economy, driven principally by the decisions of governments, business leaders, investors and consumers,” APRA Executive Board Member Geoff Summerhayes said.

“Companies that fail to respond to these forces risk being left behind. Gaining an understanding of the risks is an important first step for entities, but APRA wants to see continuous improvement in how organisations disclose and manage these risks.”