Insurers can’t afford to take a relaxed approach to pricing for climate change, because an escalation in severe weather events may leave them playing catch-up as claims costs are driven higher.

Finity Consulting says premiums are typically set annually, allowing insurers to respond to changing conditions, but companies should ease the risk of underpricing by incorporating external data that reflects weather and climate trends.

“If you do that gradually over the next 10 years or even longer, so there are not big changes all of a sudden, and insurers could be in good shape for meeting emerging claims costs that may come through,” Principal Andy Cohen told insuranceNEWS.com.au.

An article in Finity’s annual Optima report says external data may include weather station readings from the Bureau of Meteorology and information from scientific studies, cross-referenced to allow insurers to review flood and storm pricing in particular areas.

“By looking beyond the claims data to these more granular and specific resources, the insurer can reprice to respond to the changing environment as it happens, rather than always be chasing the trend,” Finity says.

“The benefits are at the margin. We would not expect a major reassessment of premium levels immediately, but over time the insurers that get this right will deliver better outcomes.”

Finity says this approach will also allow the industry to show leadership in helping the community understand how climate change is affecting risk.

See ANALYSIS.