STEP 1: IDENTIFY
CLIMATE CHANGE: ALTERING OUR PERCEPTION OF RISK The unprecedented spate of bushfires impacting huge swathes of southern and eastern Australia throughout the summer of 2019/20 has pushed climate risk firmly into the national consciousness. Meanwhile, brokers have been grappling with how they can help their clients screen for climate-related exposures and future-proof their businesses. So, what can brokers do to advise clients in managing and mitigating risk? Michelle Dunner investigates. Finity Consulting Principal Rade Musulin says while the bushfires have undoubtedly brought climate change into the spotlight, it is by no means the only culprit. “In addition to climate change, there are also cyclical effects, like a very strong positive Indian Ocean Dipole, which played a major role in this year’s extreme fires,” he says. “There are three kinds of risk that arise from the climate problem. There’s what we call physical risk, which is basically bushfire season becoming longer or cyclones migrating poleward that damage the environment and assets. “Then there’s transition risk – what changes would occur in our economy if we were to move towards decarbonisation? An example I use that people relate to is what would happen to all the petrol stations in their neighbourhood if they all buy electric vehicles? “The third one relevant to brokers is litigation risk – the risk that boards of directors, managers and other responsible parties are sued by either shareholders or other entities who say they’ve been damaged from an organisation failing to take action to mitigate climate risk.” Musulin, an actuary who has worked for over 40 years in catastrophe risk modelling and climate risk, says in the medium term, which of those three risks is most pronounced will depend on how society reacts to the threat of global warming. “If governments, or investors for that matter, push society towards rapid decarbonisation, we’re likely to see long-term physical and litigation risk go down and transition risk go up.
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DataGlobe was designed so we could get existing hazard data out into the hands of the industry, so they can give more finelytuned advice to their clients.
“Regardless of what is done in the short term on emissions, physical risks such as we are seeing from the bushfires will be a key issue due to the lag between emission levels and risk. But transition risk can emerge quickly as government policy changes." Musulin says insurance companies, in a competitive market, can only price for risk likely to occur within the policy period. “In 2020, they cannot price for climate risk that may occur in 2040. So that creates a problem; usually the insurance system is the mechanism that sends economic signals to the public about risky behaviour. In the case of climate, that mechanism breaks down. “The way to fix the problem is through encouraging future-proofing building codes and land use policies. The Northern Australia insurance problem is an illustration of what can happen when mitigation is not commensurate with our understanding of risk. That one is largely the result of a technological improvement in the way insurers rated property to better reflect risk. “The perception of risk changed, and the building stock was deemed not well-engineered. If we knew in 1980 what we do in 2020, we might not have built things where they are or how they were.” The ‘known past’ where risks are quantifiable, into the unknown future is a key issue for the industry says Mark Howden, Director of the Climate Change Institute at the Australian National University.
