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Climate change has been in the news a lot lately. It has made an appearance in various publications from the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and European Insurance and Occupational Pensions Authority (EIOPA). Here at Barnett Waddingham, we’ve been giving it a lot of thought too!
The regulatory and political focus, both national and international, on the effects of climate change and the potential response to these effects, has intensified significantly over the previous few months. Recent publications from the PRA, FCA and EIOPA show us that regulators expect insurers to take action to improve their approach to managing risks from climate change. Though in consultation stages, new EIOPA guidelines are being drafted. This includes, but is not limited to, insurers explicitly disclosing climate change exposures.
What should insurers be doing to assess these risks, in order to ensure compliance and avoid negative publicity?
The issues for insurers go way beyond the obvious short-term physical risks, for both general and life insurers. Some examples of climate change impacts include:
There are a number of actions insurers can take now, including:
- Formally setting out their approach to climate change-related risks in investment policy.
- Use of scenario analysis to assess climate risks - this is currently one of the most practical tools available as a starting point to quantify risks (e.g. in own risk and solvency assessment (ORSA)).
- Parameterise Internal Models to explicitly allow for climate change risks. For natural catastrophe estimation, this will require insurers to open a dialogue with third party vendors to understand the extent of allowances for climate change. Similarly, asset-side modelling in Economic Scenario Generators could also cater explicitly for such risks.
- Consideration of how to isolate climate change from other risks, and what weight should be given relative to other major risks such as cyber, pandemics and artificial intelligence. For example, facilitating the explicit setting of reserves related to climate change.
- Ensure annual disclosures are compliant with the Task Force on Climate-related Financial Disclosures recommendations.
The biggest challenge for insurers is taking these highly uncertain climate change risks and linking them back to what drives their insurance business. That’s where Barnett Waddingham can help.
1Energy & Climate Intelligence Unit