Banks can include climate risks in the evaluation of an asset, but rarely do it. In high-risk areas, insurance may be mandatory, but the reality is that disaster insurance premiums have been declining despite growing risks. This reflects a direct correlation between delinquencies and defaults, lack of insurance, and natural disasters.
Goals and Objectives
Factor climate risks into credit decisions to reduce risk of defaults.
Partner with insurers to mitigate risk.
Price loans to factor climate risks.
Improve balance sheet quality.
Data analytics (e.g., scenario modeling and predictive modeling), model risk management, environmental data, IoT, and APIs
Use Case Summary
Climate change is seen as an amplifier of natural disasters such as wildfires and floods. Lenders face the risk that collaterals may be destroyed or depreciate faster. This means banks need to factor environmental hazards into risk and pricing models and collaborate with insurers to mitigate these effects.