Rising Costs and Risks: How Climatics Can Support Banks and Insurers in a Climate-Impacted Future

As evidenced in Australia by recent events in Lismore, Cairns and SE Queensland, the financial sectors must adapt rapidly to a world where climate change reshapes property values, insurance premiums, and loan approvals.

The Christmas Day storm of 2023 has seen 98.9k insurance claims in Australia (image: Gold Coast Bulletin)

In an article written by Chris Baraniuk for Wired, he highlights how climate change is already impacting mortgage approvals in the US. He found that for every 1 degree Celsius increase above average temperatures, mortgage approvals in the U.S. drop by nearly 1%, and the value of these approvals falls by over 6.5% . This trend underscores the increasing reluctance of banks to finance properties that are likely to be devalued or destroyed by extreme weather.

The problem is not isolated to the U.S. In Australia, the impact of climate change on property and insurance is starkly visible. Lismore, a town built on a floodplain, has seen insurance premiums skyrocket. After the devastating floods in February 2022, insurance costs for some residents rose from about $1,000 annually to as much as $30,000. These rising costs have rendered many properties uninsurable, effectively locking out homeowners from obtaining necessary financial coverage.

Historical climate data becomes a crucial tool as banks and insurers navigate increasingly severe weather events. Climatics helps the financial industry by offering comprehensive historical climate data for any location in Australia and providing valuable insights into past weather events and trends. This data is pivotal for understanding and managing portfolio risk in a changing climate.

How Climatics Supports Banks

Banks can leverage Climatics to assess the historical climate risk of properties they consider for mortgage approvals. Banks can make more informed decisions about potential future risks by understanding the frequency and severity of past weather events in a given location. The data helps to evaluate the long-term stability of property values. For instance, properties in areas prone to repeated flooding or extreme weather can be flagged as high-risk, allowing banks to adjust their lending criteria accordingly.

With Climatics, lenders can develop more robust strategies to mitigate the impacts of climate change on their loan portfolios. This includes identifying opportunities for green financing and energy-efficient retrofitting, which can enhance the resilience and value of properties.

How Climatics Benefits Insurers

Climatics is particularly useful for insurers, who can use the data to set more accurate premiums based on the historical climate risk of different regions. This allows for a fairer distribution of costs and helps maintain affordability for customers in less vulnerable areas. By analysing historical weather patterns, they can better forecast potential claims and prepare financially for future events, which is crucial for maintaining solvency and customer trust in the face of increasing claims.

Climatics enables insurers to design policies that reflect the specific risks associated with different types of climate events. This can include tailored coverage options for flood-prone areas or regions at risk of bushfires, ensuring that policies are both comprehensive and cost-effective.

Cyclone Jasper caused widespread damage throughout Queensland in 2023 (image: Business News Daily)

The Impact on Property and Insurance Markets

The growing prevalence of severe weather events has already begun to reshape property and insurance markets globally. According to Wired, the value of properties in high-risk areas, often referred to as "subprime" locations, is steadily eroding. In the Asia-Pacific region, nearly one in ten properties owned by real estate investment trusts are at high risk of climate-change-related damage.

In Lismore, the financial burden of frequent flooding has driven a significant number of properties into uninsurability. The Insurance Council of Australia reports that the 2022 flood catastrophe led to over $5.81 billion in losses, making it the most expensive insurance event on record. This financial strain is mirrored in the rising premiums and the increasing number of properties deemed too risky to insure.

For the banking and insurance sectors, adapting to climate change is not optional; it is necessary. The integration of historical climate data, like that provided by Climatics, into financial decision-making processes is a critical step toward resilience. By accessing accurate historical data, banks and insurers can better manage risks, support customers, and contribute to the broader effort of mitigating the impacts of climate change.