Insurers face ‘strategic crunch’ as climate risk bites

Insurers face ‘strategic crunch’ as climate risk bites | Insurance Business Australia

Insurers face ‘strategic crunch’ as climate risk bites
The rising importance of climate risk, and governance around the topic, means insurers face a strategic crunch, an expert has said.

Sharanjit Paddam, principal at Deloitte Actuaries & Consultants and co-author of a new report into the risks financial institutions face from climate risk, said that the industry faces a host of pressures.

“Particularly in insurance, the industry is facing the whole reputational, government intervention problem that they already have in some areas, and this is going to get worse quite rapidly because of climate change,” Paddam told Insurance Business.

The report, entitled Climate Risk Disclosure – Financial Institutions, found that Australian regulators may force insurers and banks to adopt international risk measures to accurately assess, report, and manage the impacts of climate change. Indeed with insurers facing rising claims due to natural disasters, as well as pressure from shareholders and investors to divest fossil fuel holdings, Paddam said that climate risk could see premiums rise.

“Ultimately, if premiums are unaffordable, then insurers lose out on income,” Paddam continued. “For insurers that is the big strategic problem – the loss of business – and that is going to happen at the same time that driverless cars are going to take away the huge income that comes from motor insurance and CTP. That is a strategic crunch for the insurance industry.”

Paddam said that while insurers will look to push through price increases for those in riskier areas, a point will come when alternatives need to be considered.

“There is a significant amount of risk but I don’t think it is an unmanageable risk,” Paddam continued. “Insurers need to act now even though the risk won’t bite for another 10 years’ time.

“When you are talking about mitigation and the adaptation activity that needs to take place, that needs to start now.”

For brokers, Paddam noted they should also be invested in ensuring mitigation and adaptation work takes place to keep prices down for their client, because “if there is no insurance to sell or if it is too expensive for customers, their business goes out the window as well.”

“Brokers also have a role to talk to, particularly commercial, customers about undertaking adaptation activities and, also, explaining that to insurers so that their client can get the benefit of reduced premiums,” he said.

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