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Insurers Urged to Address 'Climate-Blind' Coverage

The recent release of the first National Climate Risk Assessment provides stark evidence that climate risk is on the rise, particularly affecting regional Australia.

The assessment highlights a significant issue within the insurance sector: a knowledge gap in the visibility of rural insurance portfolios.

Insurers are often unaware of the full extent of assets needing protection, leaving portfolios underinsured and risks improperly priced.

This gap is exacerbated by increasing climate volatility, presenting a formidable challenge for the sector.

The assessment reveals that discrepancies arise from comparing actual insured structures against those present on the ground, often resulting in underinsurance. Current methodologies rely on broad assumptions, with risk assessments often limited to postcodes or local government areas, ignoring the nuanced realities of climate events that do not respect these boundaries. As Australia faces more severe floods, fires, droughts, and heatwaves, insurers' inability to adjust methods and data collection poses a critical risk.

The report draws attention to particularly vulnerable sectors like agriculture and regional communities, where economic impacts are significant. Under moderate emission scenarios, climate-related costs could surpass $40 billion annually. Rural areas, heavily dependent on agriculture, are already experiencing increased premiums, coverage withdrawal, and challenges in obtaining insurance for essential assets.

The limitations of broad-risk analysis become evident as insurance models struggle to reflect the actual lived experiences and dynamic risks in regional areas. "Climate-blind insurance" policies, based on outdated assumptions and lack of detailed data, distort risk understanding and complicate management and mitigation efforts.

However, advancements in geospatial technology and data analytics are paving the way for a more precise understanding of risk exposure. High-resolution tools enable insurers to assess exposure more proactively and specifically, mirroring everyday technologies like geocoding used for navigation and logistics. This precision allows insurers to bridge the gap between on-paper coverage and real-world risk.

With improved insurance visibility and tailored policy-making, it becomes possible to align incentives, ensuring that insurance pricing rewards climate-smart and adaptive practices rather than merely penalising exposure. This shift towards asset-specific, risk-based pricing is changing the landscape of rural insurance, aiming to keep regional communities protected and economically viable.

The industry is entering a pivotal phase where alignment and urgency are critical. Accelerating the transition to this smarter underwriting approach requires a collaborative effort from insurers, governments, and data providers to integrate precise geospatial insights into policy administration and investment. As farmland remains a largely uncharted territory within Australia's financial frameworks, closing this data gap is essential for accurately pricing risk and building resilience.

The National Climate Risk Assessment is an essential starting point, emphasising the need for action. Moving from insight to effective application is crucial to transforming the insurance sector's approach to climate risk, ensuring that the tools available match the reality of Australia's changing climate.

Published:Wednesday, 1st Oct 2025
Source: Paige Estritori

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Knowledgebase

Whole Life Insurance:
A type of life insurance that provides coverage for the insured's entire lifetime, with a savings component that builds cash value.

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