Editing IPCC:AR6/WGII/Chapter-11 (section)

=== 11.3.8 Finance ===

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==== 11.3.8.1 Observed Impacts ====

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The finance sector has significant exposure to climate variability and extreme events ( ''high confidence'' ).

Aggregated insured losses from weather-related hazard events from 2013 to 2020 were almost AUD$15 billion for Australia (1.2% of GDP) and almost NZD$1 billion for New Zealand (0.4% of GDP) (NIWA, 2020; [[#ICA--2021|ICA, 2021]] ) ( [[#ICA--2020a|ICA, 2020a]] ; NIWA, 2020). However, there is no trend in normalised losses because the rising insurance costs are being driven by more people living in vulnerable locations with more to lose ( [[#McAneney--2019|McAneney et al., 2019]] ). In New Zealand, two major hailstorms during 2014–2020 and three major floods during 2019–2021 caused significant insurance losses ( [[#ICNZ--2021|ICNZ, 2021]] ). Insured losses exceeded NZD$472 million for the 12 costliest floods from 2007 to 2017, of which NZD$140 million could be attributed to anthropogenic climate change ( [[#Frame--2020|Frame et al., 2020]] ). In Australia, insured damage was almost AUD$1.0 billion for the Queensland hailstorm in 2020, AUD$1.7 billion for east coast flooding in 2020, AUD$2.3 billion for the 2019–2020 fires, AUD$2.3 billion for the Queensland hailstorm in 2019, AUD$1.2 billion for the North Queensland floods in 2019, AUD$1.4 billion for the NSW hailstorm in 2018, AUD$1.8 billion for Cyclone Debbie in 2017 and AUD$1.5 billion for the Brisbane hailstorm in 2014 ( [[#ICA--2020b|ICA, 2020b]] ). The insured loss from the seven costliest hailstorms in Australia from 2014 to 2021 totalled AUD$7.6 billion ( [[#ICA--2021|ICA, 2021]] ).

Some homes in the highest-risk areas tend to be in lower socioeconomic groups that may not buy insurance ( [[#Actuaries%20Institute--2020|Actuaries Institute, 2020]] ). For example, a quarter of residents that experienced loss or damage in the 2019 Townsville floods did not have insurance ( [[#ACCC--2020|ACCC, 2020]] ). Underinsurance reduces people’s capacity to recover from adverse events, while over-reliance on private insurance undermines collective disaster recovery efforts ( [[#Lucas--2020|Lucas and Booth, 2020]] ). In Australia, those in high-risk areas minimise house and contents insurance for financial reasons ( [[#Booth--2016|Booth and Harwood, 2016]] ; [[#Osbaldison--2019|Osbaldison et al., 2019]] ; [[#Actuaries%20Institute--2020|Actuaries Institute, 2020]] ). Insurance premiums in northern Australia are almost double those in the rest of Australia, and rising, mainly due to cyclone damage ( [[#ACCC--2020|ACCC, 2020]] ).

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==== 11.3.8.2 Projected Impacts ====

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Risks for the finance sector are projected to increase ( ''medium confidence'' ). The potential impact of increased coastal and inland flooding, soil desiccation and contraction, fire and wind could lead to higher insurance costs, reduced property values and difficulties for some customers to service loans ( [[#CBA--2018|CBA, 2018]] ). Under a high-emissions scenario (RCP8.5), estimated annual losses to home-lending customers may increase 27% by 2060, and the proportion of properties with high credit risk may rise from 0.01% in 2020 to 1% in 2060, assuming no portfolio changes ( [[#CBA--2018|CBA, 2018]] ). In New Zealand, weather-related insurance claims between 2000 and 2017 totalled NZD$450 million, 40% of which was due to extreme rainfall. Using six climate model projections of extreme rainfall, the insured damage is projected to increase by 7% (RCP2.6) to 8% (RCP8.5) by 2020–2040 and 9% (RCP2.6) to 25% (RCP8.5) by 2080–2100, relative to 2000–2017 ( [[#Pastor-Paz--2020|Pastor-Paz et al., 2020]] ). By 2050–2070, tropical cyclone risk for properties not in flood plains or storm surge zones in south-east Queensland may increase by 33% under a 2°C scenario and by 317% under a 3°C scenario for properties in flood plains and storm surge zones ( [[#IAG--2019|IAG, 2019]] ).

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==== 11.3.8.3 Adaptation ====

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Banks, insurers and investors increasingly recognise the risks posed by climate change to their businesses ( ''high confidence'' ) ( [[#Paddam--2017|Paddam and Wong, 2017]] ). Collaborations between banks, insurers and superannuation funds in Australia and New Zealand are driving efforts aimed at achieving the Paris Agreement goals, including the New Zealand Centre for Sustainable Finance and Australian Sustainable Finance Initiative ( [[#AFSI--2020|AFSI, 2020]] ; [[#TAO--2020|TAO, 2020]] ; NZCFSF, 2021). Company directors, including superannuation fund directors, have legal obligations to disclose and appropriately manage material financial risks ( [[#Barker--2016|Barker et al., 2016]] ; Hutley and Davis, 2019). Financial regulators are aware of climate risks for financial stability and financial institutions ( [[#RBNZ--2018|RBNZ, 2018]] ; [[#RBA--2019|RBA, 2019]] ) and are closely supervising climate risk disclosure practices ( [[#TCFD--2017|TCFD, 2017]] ; [[#RBNZ--2018|RBNZ, 2018]] ; [[#APRA--2019|APRA, 2019]] ; [[#CMSI--2020|CMSI, 2020]] ; [[#IGCC--2021b|IGCC, 2021b]] ). In Australia, regulatory action ( [[#APRA--2021|APRA, 2021]] ) includes issuing prudential guidelines for financial institutions on managing climate risk, aligned with guidelines developed by the Climate Measurement Standards Initiative ( [[#NESP%20ESCC--2020|NESP ESCC, 2020]] ). In New Zealand, the financial sector (climate-related disclosure and other matters) amendment bill aims to ensure that the effects of climate change are routinely considered in business, investment, lending and insurance underwriting decisions ( [[#NZ%20Government--2021|NZ Government, 2021]] ).

Banks and insurers are beginning to undertake climate risk analyses ( [[#CRO%20Forum--2019|CRO Forum, 2019]] ; [[#Bruyère--2020|Bruyère et al., 2020]] ) and disclose their risks ( [[#Paddam--2017|Paddam and Wong, 2017]] ; [[#ANZ--2018|ANZ, 2018]] ; [[#CBA--2018|CBA, 2018]] ). For example, the agricultural banking sector has analysed climate risk and embedded climate adaptation financing into its risk scoring and lending practices ( [[#CBA--2019|CBA, 2019]] ). However, the overall number of disclosures continues to lag expectations, suggesting the need for mandatory climate risk disclosure in Australia ( [[#IGCC--2021a|IGCC, 2021a]] ).

Climate adaptation finance is not evident ( ''medium confidence'' ). There is an adaptation finance gap (Mortimer et al. 2020). Private sector initiatives are beginning to emerge through large scale projects or public–private partnerships, such as the Queensland Betterment Fund ( [[#Banhalmi-Zakar--2016|Banhalmi-Zakar et al., 2016]] ; [[#Ware--2020|Ware and Banhalmi-Zakar, 2020]] ). Addressing investor pressure ( [[#IGCC--2017|IGCC, 2017]] ) could increase investment in adaptation. However, ongoing policy uncertainty in Australia continues to be the key barrier to allocating additional capital to invest in climate solutions for 70% of investors ( [[#IGCC--2021a|IGCC, 2021a]] ).

Current and future insurance affordability pressures could be addressed by increased mitigation, revisions to building codes and standards and better land use planning ( [[#ACCC--2020|ACCC, 2020]] ; [[#Actuaries%20Institute--2020|Actuaries Institute, 2020]] ). In New Zealand, insurance signals are motivating the government to address adaptation funding mechanisms ( [[#Boston--2018|Boston and Lawrence, 2018]] ; [[#CCATWG--2018|CCATWG, 2018]] ). Some insurers offer premium discounts to customers with reduced risk ( [[#Drill--2016|Drill et al., 2016]] ), with increasing premiums reflecting known risk and no cover for some hazards in risky locations ( [[#CCATWG--2017|CCATWG, 2017]] ). Special excess payments are available for flood hazard so customers take responsibility for part of the claim, with increasing premiums to reflect known and foreseeable risk and downgrading cover from replacement value to market value ( [[#Bruyère--2020|Bruyère et al., 2020]] ). Retreat by private insurers from risky locations could increase the unfunded fiscal risk to the government ( [[#Storey--2017|Storey and Noy, 2017]] ), creating moral hazard ( [[#Boston--2018|Boston and Lawrence, 2018]] ). The litigation risk from failing to take adaptation action ( [[#Hodder--2019|Hodder, 2019]] ) could affect financial markets and government policy settings, creating cascading impacts across society ( [[#Lawrence--2020b|Lawrence et al., 2020b]] ) [[#CRO%20Forum--2019|CRO Forum, 2019]] ). For some climate risks, national governments act as ‘last resort’ insurers ( [[#CCATWG--2017|CCATWG, 2017]] ), but this could become unsustainable ( [[#CRO%20Forum--2019|CRO Forum, 2019]] ).

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