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Industry 'most directly exposed' to climate change: RBA

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Insurers may be forced eventually to make way for governments or businesses as some assets become too risky because of climate change, the Reserve Bank of Australia (RBA) has warned.

According to the central bank, the industry is “most directly exposed to the physical impacts” of extreme weather events fueled by global warming.

“This can arise through natural disaster claims, crop insurance, and health and life insurance,” the RBA says in a report on financial stability risks from climate change.

“While insurers can increase their premiums to reflect higher risk, it is difficult to accurately price new and uncertain climate risks. If insurers under-price these risks, it could threaten their viability in the event of extreme weather events resulting in very large losses.

“On the other hand, over-pricing would impede the risk pooling function provided by insurance and unduly limit economic activity. Even if correctly priced, more of these risks may become uninsurable, forcing households, businesses or governments to bear this risk.”

The industry is already feeling the effects, the central bank says, as inflation-adjusted insurance claims for natural disasters in the current decade are more than double those of the previous 10-year period.

“This impact is likely to grow over time,” the RBA says.

The central bank defines physical risk as disruptions to economic activity or reductions in asset values from the physical impact of climate change.

Climate change will have a broad-based impact on Australian financial institutions and it poses risks that are systemic in nature, according to the RBA.

It is not an imminent threat to financial stability.