The Australian Prudential Regulation Authority (APRA) has started a general insurance climate vulnerability assessment that is examining long-term implications for the affordability of household cover. 

Executive Board Member Suzanne Smith says the assessment is looking specifically at the potential price response of Australia’s largest insurers under different climate scenarios to 2050. 

“Its purpose is to understand the long-term impacts of physical and transition climate change on the affordability of household insurance in the community, which will help predict the magnitude and concentration of climate-driven cost changes,” she told the Insurance Council of Australia (ICA) annual conference. 

The study will enable APRA to understand how insurers and reinsurers might respond to the challenge, and will provide insights on how cover availability may change by region over time and under different climate scenarios. 

APRA has been working with the ICA and major insurers in co-designing the exercise, which follows a banking sector climate vulnerability assessment. 

Ms Smith says APRA’s focus on financial stability has seen it become “increasingly uncomfortable” with the widening insurance gap being created by declining availability and affordability. 

“While most of the focus on access to insurance has centred on natural disasters, there have also been capacity challenges in some commercial lines, especially in public liability, and this has significant implications for the wider economy,” she said. 

“In some cases, insurance premiums may serve as a price signal of risk and the response should be improving risk management standards, while in other cases there may need to be a legislative response to achieve risk reduction.” 

Ms Smith says APRA is also looking to engage more with the industry on accessing alternative forms of reinsurance, which are permissible within the existing framework, and which may have pricing benefits. 

“The prudential standards around reinsurance have been in place for a while now, probably around 10 years, and there is an opportunity for us to have another look at those standards and see whether there is an opportunity for us to make any changes or tweaks,” she said. 

“We welcome insurers to bring ideas to us as well on what that could look like, and we hope to have more conversations on that over the next 12 months.”