APRA bank climate assessment points to insurance questions 

Report proposes 'self-funding' insurance model for export industries

The Australian Prudential Regulation Authority (APRA) banking climate vulnerability assessment (CVA) has pointed to interconnected financial services issues, including for insurance.  

The report, which involved Australia’s five major banks, says aggregated findings show the need for cross-industry impacts to be considered in scenario analysis initiatives.  

The assessment considered aspects of underinsurance, but didn’t measure the extent to which secondary effects may impact communities. 

“This is just one example of where further work by regulators and industry to understand how climate risk can emerge across industries, including banking, insurance and superannuation would provide broader insights into the systemic impacts of climate change on the financial system,” the report says. 

Most of the banks made assumptions that non-agricultural counterparties could materially mitigate physical risk impacts through reliance on business insurance or through operational resilience measures. 

“While these assumptions moderated the financial impact of physical risks to counterparties, it also implied a reliance on access to affordable insurance to mitigate the financial impacts of physical climate risks,” the report says. 

The banking assessment is a Council of Financial Regulators (CFR) initiative, led by APRA. The council also includes the Australian Securities and Investments Commission, Treasury and the Reserve Bank of Australia. 

The process, conducted over the past two years, involved ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac modelling the estimated future financial impact of climate change on their businesses, as well as how they might respond to the physical and transition risks. 

“APRA, together with the CFR agencies, will consider how the experience gained from the CVA may be applied to similar activities in other sectors, including insurance and superannuation, as well as the broader banking sector in future,” the report says.