NZ insurers must consider climate risk

New Zealand

The Reserve Bank of New Zealand’s latest Financial Stability Report was released last week. In it, the bank advises that insurers need to take climate risk into account when making their decisions.

While some insurers in New Zealand have begun to adjust their pricing and products to reflect the increased risks driven by climate breakdown, this could possibly render some existing properties uninsurable, creating a major challenge for property owners and lenders, even as it supports the ongoing stability and efficiency of the insurance sector.

The bank’s report makes it clear that in order to maintain a tenable situation going forward, processes need to be calibrated with a view to long-term risk trends; and as climate change – and its attendant effects – is the biggest challenge facing the human race in both the short and long term, it is time for ‘backwards-looking’ models of valuation to be updated. The bank has said that it will engage directly and in detail with insurers and other banks to understand how they are currently planning to tackle climate risk, and how to improve their efforts if they seem to be lacking.

In the report, the bank says that financial sector participants, government and the Reserve Bank itself will need to work closely together to make sure that New Zealand’s financial system remains sound and efficient going forward. And while it is impossible to predict climactic developments with 100-per-cent accuracy, a coherent national strategy is nevertheless essential.

The Reserve Bank is currently developing its own strategy to deal with climate change risk, with a focus on how to incorporate these risks appropriately into the bank’s mandate.