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APRA warns on modelling risk amid climate crisis

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Accelerating climate change could destroy the industry’s ability to predict catastrophes based on past events, making it impossible to price future risk, the prudential regulator warns.

“Historically…general insurers have thought about the past being a predictor of the future,” Australian Prudential Regulation Authority (APRA) Executive Board Member Geoff Summerhayes told a recent Actuaries Institute podcast.

“But what happens if that thesis no longer holds? And what happens if the future is behaving in ways, and the interconnectedness of events is happening in ways, that don’t appear in any of the past models, and then how do you price that? How do you risk-mitigate that?”

APRA recently surveyed 30 large banks, insurers and superannuation funds for views on climate-related financial risks. It found most are acting to increase their understanding of the threat.

Mr Summerhayes says if insurers are to underwrite infrastructure projects, they need to consider the impact of climate change on the economy over a 20-year cycle.

There is a shortage of climate data, and a lack of granularity on what is considered a material financial risk that has systemic implications, he says.