Rising to the climate challenge in Australia

The Insurance Council of Australia recently published its important feedback to the country’s Climate Change Authority Issues Paper – Setting, tracking and achieving Australia’s emissions reduction targets. Here we present the highlights.

What actions and enablers beyond those identified in the Strategic Framework could help Australia progress towards a prosperous and resilient net zero future? 

The Insurance Council welcomes the comprehensive set of actions and enablers identified in the Strategic Framework. Along with government, the insurance industry can play a critical role in delivering these actions and enablers, particularly in the areas of managing climate risk and investment.

Sustainable taxonomies and disclosure of climate-related risks will play an important role in helping the insurance industry (and the corporate sector more broadly) to manage climate risk and facilitate net-zero investment. In addition, industry collaborations to share best practices and collaborate on climate solutions will support progress towards a net zero future. 

What are your highest priorities? 

Of the six actions identified in the Strategic Framework, managing climate risk is a high priority for the insurance industry. Australia is experiencing more severe and frequent extreme weather events that are projected to increasingly exceed historical norms and occur concurrently, with the mounting direct costs of extreme weather projected to reach $35.24 billion per year by 2050.

The insurance industry is uniquely placed to understand the rising costs of extreme weather and its impacts. Since the Black Summer of 2019/20 the Insurance Council has declared 12 catastrophes, and this has resulted in insurers recording over $12 billion in claims costs over the last two years alone. 

These worsening climate impacts are also already affecting the affordability and availability of insurance in Australia. For example, in Northern Australia, the increasing scale and frequency of claims due to cyclones and flood has raised insurance costs. Climate impacts are, and will continue to have, direct impacts on the insurance market if climate risk is not managed appropriately. 

Investment is also a high priority for the insurance sector. Insurers are among the largest asset managers in the world and their approach to investing is critical in supporting the transition to a net zero economy. To enable a transition to net zero emissions, Australia is expected to need $2.5 to $3 trillion of investment in the next three decades. Insurers are increasingly supporting this transition by investing in rapidly growing transition sectors, whilst minimising the risk of exposure to stranded assets and future-proofing their portfolios. 

How are you and the people around you impacted by or preparing for the net zero transition and Australia’s climate future? 

Insurers are increasingly conducting comprehensive climate risk assessments to understand the potential impacts of climate change across their operations, underwriting and investment portfolios. Many insurers are voluntarily disclosing their climate-related risks, while they wait for more specific guidance from the Australian Government on mandatory disclosures of climate-related risks. 

Many insurers are setting emissions reduction targets and actively making efforts to reduce emissions across their operations, supply chains and investment portfolios. With the Australian general insurance industry employing ~60,000 people, decarbonising the general insurance industry’s day-to-day operations can significantly reduce emissions across the Australian economy. Likewise, general insurers managed $36.5 billion in claims in 2022, equivalent to an average of $147m every working day, so reducing emissions across their supply chains can significantly contribute to decarbonisation well beyond their own operational footprint and across all Australian communities. 

Insurers are incorporating climate considerations into their underwriting and pricing practices. For example, insurers are underwriting innovative products and solutions to address climate-related risks. In markets with well-defined net zero pathways, it is estimated that up to 70 per cent of all underwriting will support transition-related assets and technologies by 2050. This includes offering specialised insurance products for renewable energy projects, green buildings, and climate-resilient infrastructure. 

Parametric products

Insurers are also exploring parametric insurance products that provide rapid pay-outs based on predefined climate triggers, enabling faster recovery in the event of climate-related disasters. 

Insurers are tailoring their approach to investing to support the transition to a net zero economy. To enable this transition, Australia is expected to need $2.5 to $3 trillion of investment in the next three decades. Insurers are increasingly investing in rapidly growing transition sectors and aligning their investment portfolios with climate goals and net-zero commitments. They are also increasingly divesting from high-carbon assets and increasing investments in climate-friendly sectors, such as renewable energy, green infrastructure, and sustainable businesses, to minimise the risk of exposure to stranded assets and future-proofing their portfolios. 

Increased funding

The insurance industry is uniquely placed to understand how climate change is impacting on livelihoods across the country, with the McKell Institute forecasting that extreme weather events are expected to cost Australia $35.2 billion a year by 2050, creating challenges for both the affordability and availability of insurance. Without ongoing increased funding to make Australian homes, business and communities more resilient to extreme weather, coupled with a change in approach to what we build and where we build it, the risk profile of communities exposed to extreme weather risk will not improve, nor will the rising costs of insurance. In this context, tackling emissions is essential to maintain an insurable Australia, as resilience measures will reach hard limits if emissions continue to climb. Insurers are actively tackling this challenge in partnership with the Australian government via the Hazard Insurance Partnership (HIP) and supporting on-the-ground tools and partnerships to strengthen household resilience. 

In Northern Australia, the increasing scale and frequency of claims due to cyclones and flood has raised insurance costs. Climate impacts are, and will continue to have, direct impacts on the insurance market if climate risk is not managed appropriately.

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