Dr Bronwyn Claire
The globe’s climate and economy are changing. Our planning and strategies need to be driven by scientific understanding of the expected change and impacts. We are seeing this in the approach of regulators and insurance firms. The presentation first gives a summary of the global regulator community view and an example of ClimateWise member activities.
Global regulators have put out a number of publications recently that I would recommend and draw on for my comments. Specifically, I would draw your attention to last year’s Bank for International Settlements Financial Stability institute survey of supervisors ‘Turning up the heat climate risk assessment in the insurance sector’ highlighting the progress with climate risk modelling and actions by supervisors. Also, the recent Network for Greening the Financial System (NGFS) ‘Overview of Environmental Risk Analysis by Financial Institutions’ and the International Association of Insurance Supervisors (IAIS) Draft Application Paper on the Supervision of Climate-related Risks in the Insurance Sector progress the climate risk capabilities of supervisors and expectations for supervised firms. Globally few supervisory authorities undertake new system wide measures that explicitly cover climate risk, but there are climate-related risks being included in standard regulatory exercises.
The IAIS Sustainable Insurance Forum ‘Issues Paper on Climate Change Risks to the Insurance Sector’ group supervisory approaches into five key categories:
- Integrating climate factors into supervisory risk rating frameworks: assess how climate risks may affect mainstream financial risks (eg. insurance risk, market risk, credit risk, liquidity risk, operational risk);
- Strengthening disclosure of climate-related information: voluntary or mandatory public disclosure requirements or supervisory reporting (see forthcoming SIF/IAIS Issues Paper); UK position mandatory in two years.
- Integrating climate-related issues in routine supervisory review tools: eg. insurers’ Own Risk and Solvency Assessment (ORSA);
- Integrating climate risks into financial stability assessments: UK integrating weather-related natural catastrophes into general insurance stress test exercises; and
- Undertaking forward-looking climate risk assessments. UK use of scenario analysis.
ClimateWise is a group of more than 30 insurance industry members who are responding to the risks and opportunities of climate change by leading in disclosure, policy engagement, research and useful tools. Membership includes insurers, reinsurers, brokers, loss adjustors and other associations across Europe and is growing globally, with members in Asia and South Africa. ClimateWise sits within the CISL Centre for Sustainable Finance, a research, education and practice hub on financial market reform helping governments, financial institutions and businesses build a sustainable financial system.
We established the ClimateWise Principles in 2007 and updated to align with TCFD to guide members’ contribution to the transition to a low carbon, climate-resilient economy and integrate a response to the climate risk protection gap across their business and reporting activities. Members’ annual reporting is independently reviewed each year on their progress enacting the Principles and we produce a summary public report of member progress. The following examples draw on this reporting and also our research that is designed to demonstrate the strengths of insurance skills to others, and address some of the challenges.
Principle 3 is to lead in the identification, understanding and management of climate risk. Members do well in describing how processes for identifying, assessing and managing climate- related risks are integrated throughout their organisations. In underwriting, members disclose the use of tools to monitor physical risks and the function of management networks to facilitate discussions and decision-making. On the investment side, members have looked into the carbon intensity of their investment portfolios, considering the implications of physical and transition risks. Members actively undertake research and develop insurance products to support climate adaptation and mitigation initiatives. This includes insurance and risk financing solutions for clean technologies and renewable energy for commercial and domestic clients.
Looking forward, we are undertaking research that highlight both what capacity the insurance industry needs to develop and the skills we can build more widely through the insurance supply chain. Our research on scenario analysis for underwriting is investigating the ramifications of climate change by using an example peril and hypothetical portfolio of claims, to think through the implications for underwriting and liabilities, investment and assets, industry impacts, society and government. Another research paper on policy engagement for underwriting will outline the industry skill set and how it can be deployed to build climate change resilience and achieving global targets with examples and broad policy recommendations.
Insurers play a critical role in managing risk and reducing the impact of climate change. Practical advice and research collaboration will be key in order to manage climate risk efficiently and effectively.
We look forward to working with our fellow panelists and OESAI further in the future.