The insurance sector is most exposed to climate change and the toll will have consequences for the Australian economy, incoming Reserve Bank of Australia Governor Michele Bullock warns in a speech.

“Insurers are most directly affected by climate change because they offer protection to customers against natural disasters,” Ms Bullock said.

“Australian insurance payouts have been rising in real terms over the past few decades. This increase is less apparent when claims are adjusted for the cost of rebuilding and the geographic distribution of population across Australia.

“However, more frequent or more severe weather events are expected to increase claims on damaged property and other assets.”

She says unlike bank loans, insurance contracts are typically renewed annually which means insurers can react faster to climate risks by raising premiums or withdrawing from high-risk regions.

But the measures available to insurers come with consequences for Australian businesses and consumers.

Ms Bullock says raising premiums or withdrawing coverage passes the climate risk “back to the household or business, or to the lenders in the case of loan defaults where affected assets are used as collateral”.

“Indeed, the availability of insurance will influence the ability of businesses and households to recover from natural disasters, and hence could amplify the overall economic impact of these events," she said.

The Insurance Council of Australia (ICA) says Ms Bullock’s speech “correctly identifies” the challenges arising from the changing climate and what it means for the industry.

“That’s why the Insurance Council and insurers have been so forthright in our advocacy on risk reduction and mitigation,” a spokesperson for the ICA said.

“She correctly identifies that whether a risk is insured or not, someone has to pay for it. The changing climate is making already exposed areas more vulnerable, and it’s increasing the risk of events like cyclone, storm, flood and fire in areas with previously low or moderate risk.   

“We know a key lever to improving availability and affordability of insurance is reducing or mitigating the risk that is present.”

Ms Bullock, who delivered her speech yesterday at the Australian National University, says a climate scenario analysis with insurers will be conducted to better understand the risks to the financial system.

The Australian Prudential Regulation Authority will conduct the test on behalf of the Council of Financial Regulators.

“Climate change and the actions taken in response will have broad-ranging implications for the economy, the financial system and society at large,” Ms Bullock said.

“Navigating uncertainty is an inherent part of the work of a central bank. But the uncertainty around climate change is particularly acute. There is not only uncertainty around exactly how the climate will change but also around how this will affect the economy and financial system.

“The timing and intensity of effects are uncertain, and these could be severe and irreversible if tipping points are reached.”