Climate Change Risks Factor into Insurance Products in Australia

Sustainability experts and insurance companies are considering the financial implications of climate change, as rising temperatures and extreme weather events impact policyholders. Reinsurer Swiss Re has recently joined a statement promoting carbon awareness, and experts believe that business interest in climate change is not just altruistic, but also driven by financial opportunities in environmental economics. The industry is struggling to price carbon emissions, but consensus is growing, with estimates ranging from $50 to $600 per tonne of carbon.

Key Takeaways:

• Swiss Re expects Australia to follow other countries in factoring climate change into insurance policies, with certain amounts of warming already built into the global climate system.
• Reinsurer Swiss Re has joined a statement promoting carbon awareness, along with Westpac, Insurance Australia Group, Origin Energy, BP, Visy, and the Australian Conservation Foundation.
• Business interest in climate change is not just altruistic, but also driven by financial opportunities in environmental economics, including trading of carbon credits.
• Insurance companies are struggling to price carbon emissions, with estimates ranging from $50 to $600 per tonne of carbon.
• A clear, long-term framework to give industries confidence to invest large sums to reduce emissions is lacking.
• Companies are unable to properly assess the risks associated with future climate policy due to the uncertain price of emitted carbon.
• Climate change is being factored into insurance policies, with risks being priced and sold as bonds.
• The industry's lack of pricing consensus has caused ructions among business, environmentalists, and governments for decades.
• Carbon trading offers opportunities for the financial services industry to create products and price new risks.
• Boards and directors of management companies will look at ways to gain an advantage or mitigate climate risks at a price.

Statistics:

• 1000 tonnes per year: the annual emissions of someone responsible for emissions, which can inform mitigation strategies.
• $0: the price of carbon if there is no global consensus, making mitigation efforts seem like a "feel-good" activity.
• $50: a mid-range estimate of the price of carbon emissions per tonne in economic literature.
• $600: a higher estimate of the price of carbon emissions per tonne, cited as a possibility in economic literature.

Sources:

• Bruce Thomas, a sustainability expert with Swiss Re, as quoted in The Age.
• Swiss Re's statement on promoting carbon awareness.
• Westpac, Insurance Australia Group, Origin Energy, BP, Visy, and the Australian Conservation Foundation's statement on promoting carbon awareness.
• Erwin Jackson, sustainability program manager at the Australian Conservation Foundation, as quoted in the article.