Tim Grafton, chief executive of the Insurance Council, recently talked about how the industry can keep insurance affordable and accessible despite climate change, which is expected to cause inevitable and more frequent damage to New Zealand properties in the years ahead, Fairfax Media
“If nothing is done and damage gets more frequent in the years ahead, there will be the inevitable domino effect on insurance availability and property values,” Grafton said.
By reducing the risk posed by climate change, Grafton said insurers could make insurance more affordable and accessible to all. This is what he called “climate change adaptation.”
One option he presented is to provide enough information about the risks to help people “make informed decisions and the signals from insurers and banks” to “de-risk the situation.” In that option, the government needs to play a pivotal role in encouraging a resilient economy and well-functioning financial markets, the report said.
Another option is to implement building and land use regulation, long-term investment in infrastructure, and planned retreat from some areas.
Grafton said that adapting to climate change would “likely lie in a combination of both approaches and the extent of one over the other will depend on the risk assessment.”
Of the two options, he said the latter could pose a major challenge for cash-strapped councils with short-term priorities, with politics presenting an “almost impenetrable barrier to resilience.”
“There is a bridge that joins well-functioning financial markets with the need to invest long-term in adaptation measures. It starts by building a picture of the probable economic (if not social and environmental) cost of doing nothing,” he said. “If you can estimate that cost and moor alongside it, the cost of, say, infrastructural (or other) investment to mitigate the impact, you can see the value of whether to invest.”
Grafton said that what requires more thought is on how to fund the investment in order to spread the cost across both today's taxpayers and succeeding generations.
The ICNZ chief also noted that since the signing of the Paris agreement on climate change, financial institutions are rapidly moving to play an important role in providing companies with solutions in a “low-carbon future” where “global capital is chasing low returns from long-term bonds.”
“Long-term financial investors are looking to de-risk their exposure to assets to avoid the fall in value in the transition to a low carbon economy. Our own Super Fund like many others has started to take steps to do just that,” Grafton said.
“Low-carbon indexes for investors in shares are sending signals to high-carbon industries that they need to decarbonise their operations to keep attracting investment.”
He cited how some large economies are giving financial institutions opportunities to underwrite the change.
In China, private capital markets will provide 85 per cent of the funds to finance climate change.
In the UK, the Bank of England “has asked insurers how they will manage risks to physical assets they underwrite, the transitional risks from their investments in high-carbon assets and the liability risks brought against those who failed to mitigate climate change impacts they knew about.”
In France, companies are told by regulators to report on their carbon exposure — or explain why they have not.
“Insurers are society's risk manager,” Grafton said. “Climate change puts this role under threat. But risk analysis and financial innovation can build resilience keeping insurance affordable and accessible.”
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