An independent climate research institute has warned Australian financial institutions that they are not ready for the impacts of climate change with insurers the best prepared in the industry.
The Climate Institute released a new repot which details the financial system and its preparedness for climate change as the country “may be vulnerable,” a statement said.
John Connor, CEO of The Climate Institute said that while some financial institutions are planning ahead for climate change, others are ignoring the potential pit-falls.
“We know that climate change is already affecting our economy, and that some companies and financial institutions are already waking up to the implications for their own businesses.
“Yet many others are still forging ahead as though climate change, and the economic changes needed to deal with it, will have no impact at all on their plans.”
The insurance industry was praised as the “most active on climate risk” but “the sector may be uneven in its handling of climate change, particularly for institutions that rely upon historical data without incorporating recent or likely future changing climate patterns,” the report states.
The industry does face some criticism for the way in which it fails to spread risk.
“Insurers do not spread risk across geographic areas, but calculate premiums based on the risk they calculate for a specific area, down to the address where possible,” the report notes.
“Because of this, insurers will tend to respond quickly to changes in risks. Home insurance premiums in North Queensland rose rapidly since 2005-06, triggering an outcry among residents there.
“However the Australian Government
Actuary identified higher cyclone payouts as a primary cause of the dramatic premium increases. Although this cyclone risk itself was not linked to climate change, it demonstrates that insurers will not redistribute higher risks from some households, but will instead leave some properties uninsurable.”
The industry also takes some flak for its lack of collaboration with other industries within the financial sector as most detailed risk modelling across the board could help the national economy.
“Even when insurers and re-insurers do calculate climate-related risks in their own business, there are barriers to this information being transmitted to other segments of the economy or to policymakers,” the report states.
“This is particularly clear in property insurance, which is generally only extended for 12-month periods, while the mortgager has exposure for the life of the mortgage.”