Climate change

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HOW PREPARED ARE FIRMS FOR IMPENDING CLIMATE CHANGE REGULATION?

From our sample of 100 insurers, 60% mentioned climate change, with the majority considering it as a key risk. Although this is an increase from 48% last year, we would expect a higher proportion to disclose their climate change considerations in their SFCRs given the rapid development of climate regulations.

In particular, the PRA has made it clear in its July 2020 'Dear CEO' letter that firms should have fully embedded their approaches to managing climate‐related financial risks by the end of 2021, covering governance, risk management, scenario analysis and disclosure requirements. The UK government has also set out its plan to implement mandatory TCFD-aligned disclosures for UK insurers in its Interim Report of the UK’s Joint Government-Regulatory TCFD Taskforce.

In addition, the CBI, based on a speech made by the Director of Insurance Supervision on 23 June 2021, is expected to formally communicate its expectations of Irish firms in respect of climate change over the coming months and to further integrate consideration of climate related risks within the supervisory framework.

Also, EIOPA recently proposed amendments to its reporting requirements in its 10 June 2021 consultation paper, to include three climate change disclosures in insurers’ QRTs; the proportion of investments identified as environmentally sustainable in the EU taxonomy; the proportion of investments exposed to transition risk; and the proportion of investments exposed to physical risk.

0%

mentioned climate change in their SFCRs

GOVERNANCE AND RISK MANAGEMENT

Some firms have disclosed their strategic responses and efforts taken to improve oversight of climate-related financial risks.

  • Ageas approved its Climate Change Strategy in Q3 2020 which aims to integrate climate risk considerations into the business and decision-making.
  • Arch has put an initial plan in place to meet the PRA’s expectations.
  • Bupa has established a Climate Change Committee to manage the risks associated with climate change. It also mentioned that at the end of 2020, the company is fully offsetting all of its direct carbon usage.
  • Lloyd’s is currently considering the impact climate change will have on its risk profile.
  • TransRe London established a Task Force on ESG in 2019 to incorporate climate change considerations across the business, including the incorporation of ESG elements into underwriting and investment decisions.

Some firms also provided details on how climate change has been considered in their risk management processes.

  • Soteria has incorporated climate change considerations into its risk management framework and has assigned an owner who is responsible for the management and reporting of the associated risks. Based on a high-level assessment of climate change risks, it disclosed that the main risk category impacted is market risk.
  • XL Catlin has developed and implemented qualitative risk appetite statements around climate change and intends to supplement these as quantitative measures are developed. It has also adopted AXA’s Corporate Social Responsibility Policy. As a result, it now restricts coverage for coal, oil sands related assets and Arctic drilling. On the investment side, it divested investments relating to controversial weapons and long-term investments related to banned sectors.

The PRA considers scenario analysis as key for all firms to explore different climate change outcomes, and to determine the impact on firms’ overall risk profile and business strategy.

On 8 June 2021, the Bank of England published its Climate Biennial Exploratory Scenario (CBES). The CBES is an exercise to assess the financial risks from climate change for the largest UK banks and insurers, based on three different future pathways of governments’ policies.

  • AIG UK, which is one of the CBES participants, volunteered to take part in a PRA led exercise in 2021 to assess the impact of climate litigation actions, where draft litigation scenarios were provided by the PRA. It also mentioned that long tail lines, noting directors and officers (D&O) and liability lines, may be impacted by economic transition risks, where it is determined (by the courts) that companies failed to respond or take appropriate actions to mitigate the impacts of climate change.
  • Fidelis reported from its sensitivity testing that the impact of climate change on underwriting and investment performance could result in a post-loss solvency ratio of 116%, where its 2020 solvency ratio sits at 152%.
  • Lloyds Bank GI has in-house expertise that conducts forward looking climate stress testing on general insurance liabilities. The team comprises of specialists in hydrology, meteorology and probabilistic modelling. The team estimated increases of between 5% and 43% in average annual claims costs arising from severe weather across three scenarios over three different time horizons out to 2100.
  • XL Catlin has developed its own natural catastrophe stress test, and also plans to develop additional climate stress tests.

SCENARIO ANALYSIS

DISCLOSURE REQUIREMENTS

The UK government also requires UK insurers to embed the TCFD recommendations into their reporting by end-2021. Also, the Irish government communicated that it welcomes firms’ adoption of the TCFD recommendations and is actively encouraging greater take up as more Irish firms look to accelerate and scale their own climate transition plans.

We found that only 6% of firms referenced the TCFD recommendations in their SFCRs. A similar proportion of insurers also referenced the PRA’s Supervisory Statements on climate change, namely the SS3/19, which sets out expectations on how firms should respond to the financial risks from climate change.

  • Endurance Worldwide disclosed that it has been a member of the Principles for Sustainable Insurance Initiative (PSI)-TCFD Insurer Pilot Group of the United Nations Environment Programme Finance Initiative (UNEP FI) since 2018.
  • QBE UK reported that QBE Group continues to support the objectives of the Paris Agreement and TCFD recommendations. It has clearly defined the roles and responsibilities for effective oversight and management of climate-related risks and opportunities at the Group Board and senior management levels. It also has several working groups focussing on physical, transition and liability risk analysis and is committed to strengthening its data, scenario analysis and modelling over the medium to long-term.

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