Estimated reading time: 3 minutes
Climate change related risks are very high on regulators' radars. UK insurers are required to have embedded climate change related risks by 31 December 2021 and the Chancellor has recently announced that all UK insurers must meet Task force on Climate-Related Financial Disclosures (TCFD) requirements by 2025.
However, our experience suggests that firms are at different stages in terms of their climate change related risk management.
We reviewed the 2019 annual report and accounts for ten insurance firms who write life insurance business in the UK; Aviva, Just, L&G, NFU, OneFamily, PIC, Rothesay, Royal London, Scottish Friendly, and Wesleyan. We wanted to see what they are saying about climate change risk.
This blog summarises our findings.
- The good news is that every firm recognised climate change as a risk (and often an opportunity).
- Two of the ten firms have separate, dedicated climate related reports in addition to statements in their annual reports.
- Two other firms reported following the recommended Task force on Climate-Related Financial Disclosures (TCFD) structure.
- As above, all of the companies include the consideration of climate change in their risk framework.
- Only one treats climate risk as a stand-alone risk; the remaining nine treat it as a cross-cutting risk that impacts other risks such as market or insurance risk.
- Interestingly, four of those reviewed still consider climate change related risk to be an emerging risk.
- Most of the companies reviewed disclosed that they include climate change scenarios in their Own Risk and Solvency Assessment (ORSA).
- Limited information is given on the scenarios used. Those disclosed included:
- The Climate Change scenarios set out in the PRA Insurance Stress Test 2019;
- Scenarios consistent with pathways based on the four Intergovernmental Panel on Climate Change (IPCC) scenarios;
- Scenarios based on pathways consistent with Paris Agreement temperature scenarios.
In addition to managing the risks of climate change, a small number of the firms reviewed have set themselves goals to reduce their impact on the climate, either directly or in respect of their investments.
- The most common goal is committing to investing in line with the Paris agreement (limiting global warming to 1.5°C).
- A list of all metrics published are:
- Portfolio carbon intensity
- Operational carbon footprint
- Greenhouse gas (GHG) emissions
- MSCI ESG ratings vs benchmarks
- Climate VaR
- ND-GAIN index ratings vs benchmarks
- Actual versus Expected weather related losses
Interestingly, the responsibility for climate-related risks was considerably varied across the firms reviewed.
- For most companies the Chief Risk Officer (CRO) takes at least partial responsibility for climate risks. For three firms, the Chief Financial Officer (CFO) also takes some responsibility and for one firm, the Head of Asset Liability Management has specific responsibility.
- All firms have a clear committee or Board responsibility but again this varies by firm, depending on the governance structure of the firm.
Our review shows that, at 31 December 2019, there was a wide range of climate risk related disclosures across UK life insurers. This reflects the various stages that insurers are at in embedding these risks.
It is clear that climate related risks and opportunities are going to attract more focus going forward from regulators, customers and investors. Please contact any of our consultants if you wish to understand how Barnett Waddingham can help firms to improve their disclosures, as well as to define and meet their climate-related goals for 2021.
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