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Insurers need commercial imperative to adapt to climate change

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The insurance industry can play a critical role in encouraging adaptation to climate change but needs a commercial imperative to do it, say researchers from the University of Sydney.

The University’s Business School has conducted a case study into an unnamed insurance company as part of a wider project into business responses to climate change and says insurers can signal the importance of preparing for climate change through pricing and exclusions.

“This imposes an ‘adapt or pay’ pressure on their customers and encourages adaptation before a disaster strikes,” they say in a response to the Productivity Commission’s draft report into barriers to climate change adaptation.

The researchers say insurers need to price risk correctly to manage their exposure to climate change events. 

If premiums continue to rise, the health of the insurance market could be affected, which drives insurers’ interest in mitigation and preparation.

They say regulations and policy should encourage market pricing signals or other clear commercial imperatives.