Last month’s 6th Intergovernmental Panel on Climate Change (IPCC) report was more or less dismissed by Australian and US policy makers and the usual climate-change-denying-pundits. It may be disturbingly easy for climate change to STILL be dismissed as some kind of greenie hoax, for politicians and influencers to ignore scientists with “vested interests” in attracting grant money. It is surely much harder to deny the truth of climate change when actuaries get involved?
The Australian Actuaries Climate Index is a multi-year project that aims to develop indices for extreme weather and resultant risks to human health, property and the natural environment. The Australian index follows a similar one undertaken by US actuaries.
It reflects growing pressure from prudential and securities regulators, investors and the IPCC itself for business to disclose their exposure to climate change risks. Partly in response to this, global re-insurers and many investors are increasingly ruling out investments in coal.
The Australian Actuaries Index will draw heavily on data already available from the Bureau of Meteorology and the CSIRO on local weather extremes. It’s information that has already been factored in by many insurers and investors, so the new index shouldn’t result in major price hikes but will eventually flow-on to costs.
The Australian Prudential Regulation Authority (APRA) has warned that the risks of climate change were “foreseeable, material and actionable now”, and says the index was “a positive step towards helping regulated entities to understand and manage the potential impact of climate risk on their businesses”.
It’s this type of work that will undoubtedly feed into a greater range of risk mitigation products for farm businesses. Multi-peril crop insurance (MPCI) is the type of product commonly considered. However, Australian Farm Institute boss Richard Heath notes there are other risk mitigation products such as income insurance and weather derivatives that could also be options to manage risk beyond the cropping industry – and for a wider range of income-impacting events.
Heath points to two decades of failure in launching these types of products in Australia and believes there is an important role for government as a re-insurer – providing a stop loss mechanism to cap losses for insurers, lower premiums and encourage uptake. This type of intervention could help the market mature, generate larger premium pools and spread risk within a framework that encourages competition and the development of a suitable range of products.
It could be an important part of a cohesive drought policy that encourages farm resilience and a more volatile climate. But with many senior members of the current federal government in complete denial distortionary, stop-gap measures for isolated drought events remain the order of the day – even while actuaries are beavering away measuring the cost.