You might not immediately connect your insurance premiums and coverage limits to climate change, but insurers have been doing so for several years. They're grappling with the impacts of increasingly extreme and unpredictable weather patterns and need to account for this accordingly

As the magnitude and frequency of those events change, it throws a spanner in the works for insurers to calculate their risks of loss. That means they’ll limit their exposure, leaving consumers and governments to take up the slack.

In response to the climate change trajectory, APRA has made amendments to the Prudential Guidance CPG 229. These changes confirm that, from a regulatory perspective, insurers have an obligation to manage the financial risk arising from climate change. The amendments are related to capital adequacy, the use of climate-related targets, and disclosing key design features of scenario analysis.

Australia’s changing climate

These trends will continue, say the CSIRO and the Bureau of Meteorology in its State of the Climate report, and will include:

• More extreme heat

• Heavier rainfall in central and northern parts of Australia

• Meanwhile, lower rainfall between April to October in Australia’s south

• More frequent and more dangerous fires

• Increased risk of droughts

• Continued acidification 0f oceans

• Rising sea levels that damage coastal infrastructure and communities.

The culprit? Greenhouse gases are at their all-time highest. That strong underlying warming trend impacts supposedly cooling weather patterns such as the La Niña weather pattern. Last year had above-average rainfall and was one of the hottest years since records began in 1910.

Insurance consequences of climate change

To give it some context, in the three months to February 2020, insurers paid out about $5 billion due to the impacts of extreme weather and natural disasters.

The Insurance Council of Australia points out that global warming will increase damage to infrastructure, property and assets. Consequently, Australians will need to claim on their insurance policies more often. It follows that, if governments don’t invest in the right physical mitigation and adaptation strategies, some regions may be “uninsurable” in the future, according to the council.

Will insurance costs rise with the temperature?

That’s why insurers have shifted from a ‘community model’ of cover based on a neighbourhood, suburb, town, or region. Now their access to big data means they do ‘individual pricing’ down to a single household or business. So, premiums rise for some people or businesses or decrease for others, says a climate change expert in The Guardian. However, the Climate Council expects one in every 19 property owners will face unaffordable insurance premiums by 2030. It classifies unaffordable as insurance costing 1% or more of the property value per year.

To help ensure Australians can afford and access insurance, the Insurance Council of Australia has set up a Climate Change Action Committee. It’s working with stakeholders and partners on projects focusing on green building, flood, fire, and emergency services.

Commencing 1st July 2022, there is a new mandated reinsurance pool, backed by a $10 billion Government guarantee, for cyclones and related flood damage. The draft legislation will enable the Australian Reinsurance Pool Corporation to administer both the cyclone pool and the existing terrorism reinsurance scheme.

Possible future effects

The risk of rising insurance costs has got the attention of the Australian Prudential Regulatory Authority (APRA). The authority says climate change could challenge the financial system’s stability and resilience. Together with the National Australia Bank, it’s undertaking a climate vulnerability assessment for banks and financial institutions, which it says will also be useful for the insurance sector. In its information paper, APRA says climate change poses ‘system-wide’ risks spanning:

• Physical risks - acute and chronic to agriculture and non-agricultural based lending

• Transition risks associated with economic and technological changes, including social adaption

• Liability risks – directors need to be aware of possible stakeholder litigation and regulatory fines.

And it’s not just a simple single scenario, but at least a couple depending on global greenhouse gas emissions and governments’ measures to curb those.

According to the National Climate Change Adaptation Research Facility, here’s how climate change could affect your sector:

• Construction: heavier rainfall and the greater need for flood mitigation measures to delay building, while protracted hot weather will impact productivity

• Property: more floods and sea-level rises will lead to pricier insurance and reduced land values

• Mining: scarcer water availability and elsewhere increased flooding will increase costs, competition for water, impact supply chains and flood mines

• Listed corporations: all climate variables will lead to an upswing in potential litigation related to companies failing to disclose impacts considered ‘foreseeable’

• Agribusiness: higher temperatures and changes in the hydrological cycle to reduce crop yields and impact yields overall.

Discuss your risk mitigation plan with us

And it’s not just the authorities betting on worsening weather. An Ipsos poll found that almost seven in 10 Australians said they expected 2022 to feature more extreme weather events due to climate change compared to last year.

So forewarned is forearmed. There’s a lot you can do to mitigate your risks on a personal and business level. It’s a two-way street – you can manage your environmental impact as well as be prepared for climate change’s impacts on you and your ventures.

Check out these four key policy changes the Federal government can make to support Australian businesses to address climate change. Here are five actions that businesses can take to manage the latter, thanks to Global Compact Network Australia. Meanwhile, Governance Institute of Australia outlines the organisations’ risks and opportunities of climate change.

Be sure to talk to us to help reduce your risk profile for the predictable and unpredictable elements.