Revealed – how nature’s decline is reshaping Australia’s insurance industry
Revealed – how nature’s decline is reshaping Australia’s insurance industry | Insurance Business Australia
Environmental
Revealed – how nature’s decline is reshaping Australia’s insurance industry
Report identifies primary risks that nature poses to insurers
Environmental
By
Roxanne Libatique
The Insurance Council of Australia (ICA) has released its Advancing Resilient Nature Positive Insurance in Australia report, shedding light on the increasing interplay between nature and the insurance industry.
The findings underscore how natural systems are crucial to the economy and highlight the risks that environmental degradation poses to the sector.
Connection between nature and insurance
The report emphasises that the insurance industry is heavily reliant on the natural world. Insurers provide coverage for industries such as agriculture, construction, and manufacturing, which depend on natural resources like water, clean air, and raw materials.
As these natural resources become strained due to factors like climate change, pollution, and habitat loss, the risks to insurers grow. This connection between nature and insurance is becoming more significant as ecosystems continue to deteriorate.
The ICA noted that, in 2022, insurers in Australia handled over 302,000 claims resulting from natural disasters, costing $7.28 billion in insured losses. Events such as floods, bushfires, and storms are becoming more frequent and intense, contributing to rising claim costs and affecting the financial stability of the insurance sector.
The report identified three primary risks that nature poses to insurers:
physical risks;
transition risks; and
systemic risks.
Physical risks arise when natural systems on which industries rely are compromised, such as droughts affecting agriculture or rising sea levels threatening coastal properties. Transition risks involve shifts in regulations, markets, or policies as industries adjust to environmental challenges. Meanwhile, systemic risks concern broader economic impacts from the breakdown of key natural systems.
Insurance affordability
A critical issue raised in the report is the impact on insurance affordability. As natural disasters become more common, premiums in high-risk areas are rising, putting pressure on homeowners and businesses.
How insurers could mitigate nature-related challenges
Despite these risks, the report outlined several opportunities for insurers to mitigate nature-related challenges.
One solution is the adoption of nature-based approaches to reduce the vulnerability of insured assets. For example, wetlands and mangroves can help absorb floodwaters, while coral reefs can protect coastal areas from storm surges. By leveraging these natural defences, insurers can reduce the frequency and severity of claims and help manage costs.
The report also pointed to innovative insurance products that incentivise customers to adopt sustainable practices. Insurers could create policies that encourage the use of green building materials or reward policyholders for protecting natural assets. Such products would not only help reduce environmental risks but also open up new markets and business opportunities for insurers.
Collaboration between the public and private sectors is seen as crucial to managing nature-related risks and keeping insurance affordable. The report suggests that insurers, policymakers, and other stakeholders work together to develop frameworks for nature-related risk management and standardise metrics for reporting environmental impacts.
In addition to managing risks, the report stressed that insurers have a significant opportunity to support Australia’s transition to a more sustainable economy. It highlighted the role that nature-based carbon offset projects could play in helping Australia meet its emissions reduction goals. By investing in projects that restore ecosystems, insurers can contribute to reducing climate risks while enhancing the resilience of the sectors they underwrite.
The ICA, which recently published a new charter designed to address the emerging risks posed by extreme weather events, emphasised that the integration of nature-positive strategies into business operations will be essential for insurers to address the challenges posed by environmental risks.
Insurers are encouraged to assess their exposure to these risks, adopt sustainable practices, and report transparently on their environmental impacts. These actions, according to the report, will help insurers manage nature-related risks and contribute to a more resilient and sustainable economy.
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