Climate risk a growing concern

Climate risk a growing concern

By May 8, 2018 News

Government, business leaders and industry regulators are recognising that climate change represents a systemic financial risk that can no longer be ignored.

“I’d be surprised if there were many Directors who haven’t checked what their company is doing in relation to climate risk,” said Finity Director, Tim Andrews. “Also, APRA have made it quite clear that they see climate risk as being both foreseeable and actionable now.  They are encouraging businesses to do their own stress testing and are approaching firms to see what they are doing in relation to climate risk.

“Beside the encouragement from APRA and Directors, the other key issue driving insurer action is one of disclosure."

Following concerns about the threat to global financial stability from climate-related risk the Task Force on Climate-related Financial Risk Disclosures (TCFD) released a globally consistent recommended framework for climate disclosures. This has received widespread support from investor groups, regulators and financial institutions.

“The G20 was concerned that the financial markets were not be adequately factoring in climate risk and the TCFD was established. As a result of the TCFD recommendations we expect to see listed insurers disclosing climate risk in their financial statements at some stage in the next few years, and its going to be interesting to see how this disclosure affects the behaviour of other insurers,” said Tim.

General insurers are well placed to manage the physical risks of climate change due to their ability to re-price and re-underwrite risk on an annual basis. Whilst most of the variability in weather related claims costs in the last 10 years would reflect natural climate variability, Tim is concerned that some insurers may nevertheless be underestimating the gradual increase in natural peril costs that is occurring.

“The insurers are at risk of always being in a position of playing catch up with natural peril funding unless more specific recognition is given to the gradual impacts arising from climate change.”

In response to growing industry concern, Finity has recently launched a climate risk discussion group where insurers can meet on a regular basis to discuss the latest climate change news and research relevant to the insurance industry.

Learn more about Climate Risk.