The insurance industry will need to assess climate change and urban development risks more effectively to ensure cover in high-exposure regions is sustainable in the long term, Swiss Re says.

The reinsurer says reliance on historical loss data or incomplete and outdated models could cause underwriters to underestimate the extent of increasing risks that are already becoming evident.

“What we really can’t afford to do is wait 20 years to see what the emerging trends have been and then take account for it,” Head of Property Underwriting for Australia and New Zealand David Sinai told insuranceNEWS.com.au. “This is something we need to get used to as an ongoing change in our business.”

Swiss Re’s latest Sigma report, Natural catastrophes in times of economic accumulation and climate change, says many catastrophe models “rooted in the past” don’t fully account for exposures from rising “value concentration”, particularly as urban development sprawls into hazardous zones.

Loss creep, which refers to mounting losses over time, has been visible after major hurricanes and typhoons and is also not always fully reflected in models.

Risks are likely to escalate as urban issues are overlaid by climate change impacts that increase the threat from bushfires, cyclones and other events, particularly if mitigation measures don’t keep pace, Swiss Re says.

“We believe weather-related risks remain insurable, [but] the time to act is now,” the report says.

“The long-term risk of unmitigated climate change is irreversible ‘tipping points’ and in this scenario, climate change effects could bring the insurability of assets, particularly in regions with high exposure accumulation, into question.”

For business model to be sustainable as the climate changes, insurers need to keep up with latest scientific findings and incorporate them into their natural-catastrophe models, it says.

In Australia, the Gold Coast is an example of a location affected by rising economic and climate risks, Mr Sinai says. Urban development in the area has increased sharply compared to decades earlier, while research suggests more intense cyclones may move further south.

The recent bushfire season, which was the longest yet and burned more land and houses, has also highlighted risks, while average catastrophe losses in the past decade were a step-change above the previous 10 years and above the longer-term average.

“If that is a trend that is going to continue then obviously insurers need to factor that into their risk assessment,” Mr Sinai said. “Otherwise they will end up with underfunded risks on their books.”

Swiss Re Australia and New Zealand Head Mark Senkevics says while governments are currently prioritising the COVID-19 pandemic, mitigation and climate change issues remain on the agenda.

He says a positive step was taken last week with the announcement of new government agency, Resilience NSW, he said. Its broad mandate extends across crises including the coronavirus pandemic, bushfires, drought and flood.

“My hope is that other states will establish something similar, and the Federal Government would need to have something as well,” he said. “There is a co-ordinating role that could play through here.”