Economic risk from climate change

For the financial industry, there are three major climate risk categories: physical risks, liability risks and transition risks. Physical risks include those from increased incidence and severity of floods, wildfires and storms. Liability risks arise if those suffering climate change-related losses, including shareholders, pensioners, and others, seek compensation from those considered to be responsible - including company directors and pension trustees. Transition risks are caused by the downward revaluation of assets during an adjustment to the lower-carbon economy and the phase out of fossil fuels.

Even before it has ended, 2017 will likely prove to be the costliest year in the history of the global insurance industry, an even worse catastrophe year than 2005 when there was $US77 billion in insured losses (based on 2016 dollars) related to Hurricanes Katrina, Wilma, and Rita. Insurers and reinsurers faced a large spike in claims in 2017 following a slew of devastating natural disasters, ranging from Cyclone Debbie, Hurricanes Maria, Harvey and Irma and the earthquake in Mexico City. This will likely wipe out global reinsurers' annual earnings and ultimately become a capital event for this sector. Reinsurers are nervously watching the remainder of the Atlantic hurricane season and the California wildfires.