The UK-based scientific group the Royal Society says principles used in insurance should be adopted more broadly in the financial sector, to ensure weather risks are made clear as climate changes.

“At present, the financial system as a whole does not take adequate account of the risks posed by extreme weather,” the society says in a report called Resilience to Extreme Weather.

Investment decisions are likely to be based on political and economic factors, with little consideration given to disaster risks, while company valuations do not reflect differing exposures to events such as floods.

“Until these risks are accurately evaluated and reported, companies will have limited incentives to reduce them, and valuations and investment decisions will continue to be poorly informed.”

The society says insurers and reinsurers have made “considerable progress” in evaluating the risks from extreme weather.

“Although insurance premiums do not always disincentivise investment in hazard-exposed areas, the principles, techniques and institutions developed in the (re)insurance sector could facilitate reform in the wider financial system.”

The report suggests public and private organisations may be required to report their financial exposure to extreme weather at a minimum of 1%-per-year risk levels.

The economic cost of extreme weather events between 1980 and 2004 is estimated at $US1.4 trillion ($1.7 trillion), according to the report.

“This shows that societies are not resilient to extreme weather today and our analysis shows that the risk it poses is increasing.”

The report calls for mitigation options such as dams and sea walls to be used in combination with ecosystem-based approaches including mangrove re-establishment and vegetation planting.

“We need to make sure large-scale engineering isn’t making us too complacent,” report working group member Nancy Grimm said.

“In the developed world we have been heavily reliant on some key large-scale… engineering projects, which have been pushed to their limits during recent events.”