Insurers are under increasing pressure to enhance their climate risk management practices and provide appropriate public disclosures. However, for many insurers this is still work in progress, and they are having to rapidly evolve their processes to meet these requirements. This new report analyses the current state of climate risk integration within the industry by looking at the climate-related public disclosures of insurers across Europe and the UK. The benchmarking exercise looks at the approaches of some of the largest and most sophisticated insurers, resulting in insights into emerging best practice in climate risk management and disclosures, and the nature of insurers’ emerging responsibilities in this critical area.
Climate change and its associated risks and opportunities continues to demand attention and actions across society as a whole. Beyond the ecological threat it poses to our planet, climate change is widely recognised as a systemic economic risk and is high on the agenda of the Financial Stability Board (FSB), the International Monetary Fund, several inter-governmental bodies and national regulators.
The insurance industry is uniquely positioned (and exposed) within the financial services industry in relation to climate change due to the nature of its business.
- As a large global industry, it is a contributor to carbon emissions through its operating activities and offices.
- As an institutional investor, it has the power to allocate capital to more climate-aware assets and strategies, and drive and support changes in corporate behaviour through ongoing stewardship and engagement. As an illustration, a recent publication by the International Association of Insurance Supervisors (IAIS) suggests that as much as 35% of the global insurance industry’s investment assets could be considered ‘climate-relevant’ i.e. exposed to climate risks.
- As a carrier of risk, insurers are further exposed to climate-related and natural catastrophe claims.
The integration of climate risks into all aspects of insurers’ business is therefore a key strategic focus, driven by both direct emerging regulatory requirements, and pressures from other stakeholders such as non-executive directors (NEDs), shareholders and policyholders. Very recent developments include the latest status update from the FSB around climate risk reporting; the recommendation from the European Commission around insurers undertaking long-term climate risk scenario analysis; and the UK Government revealing its ‘Greening Finance Roadmap’ to mitigate greenwashing through enhanced disclosures and green taxonomy, and to support a transition to a greener financial system.
Engaging with climate change requires insurers to invest extensive time and resources. While the scale and pace of progress varies depending on the size of insurer and their location, significant extra effort is still required for the vast majority.
This article is shared with the kind permission of Royal London Asset Management (RLAM), one of the UK’s leading fund management companies and part of ICMIF member Royal London Group, the UK's largest mutually owned pension and investment company.
To download the full report Climate risk management for insurers – Benchmarking of emerging best practice, a collaboration between RLAM and Solvency II Wire, click here.
Published March 2022
The challenges insurers face managing climate risk include:
- In-house expertise – increasing demands on existing resources and a reliance on third party inputs to manage a highly specialist and evolving area of expertise.
- Data issues – low data quality and availability on both the asset and liability sides of the balance sheet.
- Modelling requirements – increasing expectations to undertake climate-related scenario and stress testing analysis to help understand insurers’ exposure to climate-related risks.
- Reporting and risk management – lack of clear standardisation of climate-related metrics.
- Credible definition of objectives – defining high-level beliefs and objectives around climate risk remains highly subjective and there is a need to integrate the downstream impact on wider risk, capital, investment and underwriting approaches.
This paper evaluates the current state of climate risk integration within the European insurance industry by analysing the climate-related public disclosures of some of the largest European and UK insurers. By focusing primarily on investment approaches and drawing from a wide range of disclosures across the market including the Solvency and Financial Condition Reports (SFCRs) and other publicly disclosed information, it identifies areas of best practice as well as gaps in climate risk disclosure and integration.
