Public

Application Paper on the Supervisionof Climate-related Risks in the
Insurance Sector

PublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
Adopted by the IAIS Executive Committee – May 2021

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About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganisation of insurance supervisors and regulators from more than 200 jurisdictions. The
mission of the IAIS is to promote effective and globally consistent supervision of the insurance
industry in order to develop and maintain fair, safe and stable insurance markets for the benefit
and protection of policyholders and to contribute to global financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory
Council of the International Accounting Standards Board (IASB), and partner in the Access to
Insurance Initiative (A2ii). In recognition of its collective expertise, t he IAIS also is routinely
called upon by the G20 leaders and other international standard setting bodies for input on
insurance issues as well as on issues related to the regulation and supervision of the global
financial sector.
About the SIF
The UN-convened Sustainable Insurance Forum (SIF) is a leadership group of insurance
supervisors and regulators working together to strengthen their understanding of andresponses to sustainability issues facing the insurance sector. The long-term vision of the SIF
is a global insurance system where sustainability factors are effectively integrated into theregulation and supervision of insurance companies. The United Nations Development
Programme (UNDP) serves as the Secretariat for the UN-convened SIF. The SIF works
closely with the IAIS, delivering collaborative projects and research on climate change issues.
As of May 2021, the SIF has 31 jurisdictions as members.
Application Papers provide supporting material related to specific supervisory material (ICPs
and/or ComFrame). Application Papers could be provided in circumstances where thepractical application of principles and standards may vary or where their interpretation andimplementation may pose challenges. Application Papers do not include new requirements,
but provide further advice, illustrations, recommendations or examples of good practice tosupervisors on how supervisory material may be implemented. The proportionality principle
applies also to the content of Application Papers.
International Association of Insurance Supervisors
c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 280 8090 Fax: +41 61 280 9151
www.iaisweb.org

This document is available on the IAIS website(www.iaisweb.org).
© IAIS, 2021.
All rights reserved. Brief excerpts may be
reproduced or translated provided the source isstated.

PublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
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Contents
Acronyms........................................................................................................................... 5
1

2

3

4

5

Introduction ................................................................................................................. 6
1.1

Context and objective ........................................................................................... 6

1.2

Related work by the SIF and IAIS.......................................................................... 6

1.3

Proportionality ...................................................................................................... 7

1.4

Terminology ......................................................................................................... 7

1.5

Scope................................................................................................................... 8Role of the Supervisor ................................................................................................. 9
2.1

Preconditions and resources ............................................................................... 10

2.2

Supervisory review and reporting ........................................................................ 12

2.2.1

Information gathering and sharing ................................................................ 12

2.2.2

Supervisory feedback and follow-up............................................................. 13

Corporate Governance .............................................................................................. 14
3.1

Appropriate allocation of oversight and management responsibilities ................... 15

3.2

Business objectives and strategies of the insurer................................................. 15

3.3

The role of the Board .......................................................................................... 15

3.4

Duties of Senior Management ............................................................................. 16

3.5

Duties related to remuneration ............................................................................ 16

Risk Management and Internal Controls..................................................................... 16
4.1

Integrating climate-related risks into the scope of the risk management system.... 17

4.2

Consideration of climate-related risks by the Control Functions............................ 17

4.2.1

Risk management function........................................................................... 18

4.2.2

Compliance function .................................................................................... 18

4.2.3

Actuarial function ......................................................................................... 18

4.2.4Internal audit function................................................................................... 19

4.3

Fitness and propriety of Control Functions on climate-related issues.................... 19

4.4

Integrating climate-related risks in outsourcing decisions ..................................... 19

Enterprise Risk Management for Solvency Purposes ................................................. 21
5.1

Underwriting policy ............................................................................................. 22

5.1.1

Consideration of climate-related risks in the underwriting policy .................... 22

5.1.2

Consideration of climate-related risks in the underwriting assessment .......... 22

5.1.3

Monitoring of underwriting exposure to climate-related risks ......................... 23

5.2

Own Risk and Solvency Assessment (ORSA) ..................................................... 24

5.2.1

Stress testing and scenario analysis of climate-related risks ......................... 24

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6

7

Investments............................................................................................................... 28
6.1

Climate-related risks for investments................................................................... 28

6.2

Asset liability management (ALM) ....................................................................... 29

6.3

Risk assessment of investments ......................................................................... 29

6.4

Impact of investments on climate change ............................................................ 30

Public Disclosure ....................................................................................................... 31
7.1

General disclosure requirements......................................................................... 32

7.2

Company profile ................................................................................................. 32

7.3

Corporate governance framework ....................................................................... 33

7.4

Insurance risk exposures .................................................................................... 33

7.5

Financial investments and other investments....................................................... 33

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Acronyms
A2ii

Access to Insurance Initiative

ACPR

Autorité de Contrôle Prudentiel et de Résolution

ALM

Asset-liability management

BaFin
BMA

Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial
Supervisory Authority)
Bermuda Monetary Authority

BNM

Bank Negara Malaysia

CSR

Corporate social responsibility

ComFrame
DNB

Common Framework for the Supervision of Internationally Active InsuranceGroupsDe Nederlandsche Bank (Dutch Central Bank)

EIOPAEuropean Insurance and Occupational Pensions Authority

ERM

Enterprise risk management

ESG

Environmental, social and governance

EU

European Union

FSB

Financial Stability Board

GHG

Greenhouse gas emission

IAIS

International Association of Insurance Supervisors

IAIG

Internationally Active Insurance Group

ICP

Insurance Core Principle

IDF

Insurance Development Forum

IPCC

Intergovernmental Panel on Climate Change

IST

Industrywide Stress Test

ND-GAIN

Notre Dame Global Adaptation Initiative Index

NGFS

Network for Greening the Financial System

OECD

Organisation for Economic Co-operation and Development

ORSA

Own risk and solvency assessment

PACTA

Paris Agreement Capital Transition Assessment

SIF

Sustainable Insurance ForumTCFDTask Force on Climate-related Financial Disclosures

UK PRA

United Kingdom Prudential Regulation Authority

UN

United Nations

UNEP

United Nations Environment Programme

US NAIC

United States National Association of Insurance Commissioners

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1

Introduction
1.1

Context and objective

1.
Climate change is recognised as an overarching global threat. It impacts human,societal, environmental and economic systems, through rising temperatures and theirconsequences, including rising sea levels and an increasing frequency/ severity of natural
catastrophes and extreme weather events. Climate change, as well as the global response to
the threats posed by climate change (eg the reduction of greenhouse gas emissions (GHG)
and adaptation programmes) may have wide-ranging impacts on the structure and functioningof the global economy and financial system.
2.
There is growing recognition that climate change and climate-related risks are a sourceof financial risk,1 having an impact on the resilience of individual financial institution s, including
insurers, as well as on financial stability. Climate-related risks are material for the insurance
sector as they impact the insurability of policyholder property and assets as well as insurers’
operations and investments. Therefore, supervisor s should identify, monitor, assess andcontribute to the mitigation of the risks from climate change to the insurance sector. Climatechange also presents opportunities for the insurance sector: the insurance industry plays acritical role in the management of climate-related risks in its capacity as an assessor, manager
and carrier of risk and as an investor, and is uniquely qualified to understand the pricing ofrisks. Notably, through risk-based pricing, insurers provide critical economic signals regarding
the changing risk environment. Insurers can also help build resilience through (inclusive)
insurance.2
3.
An adequate response from supervisors to both the risks and opportunities fromclimate change will support the objectives of insurance supervision of protecting policyholders,
contributing to financial stability and promoting the maintenance of a fair, safe and stable
insurance market (see Insurance Core Principle (ICP) Standard 1.2).
4.
This Application Paper aims to support supervisors in their efforts to integrate climate
risk considerations into the supervision of the insurance sector. It provides background andguidance on how the IAIS supervisory material can be used to manage the challenges andopportunities arising from climate-related risks. Application Papers do not establish standards
or expectations, but instead provide additional guidance to assist implementation and provide
examples of good practice. This Paper thereby also aims to promote a globally consistent
approach to addressing climate-related risks in the supervision of the insurance sector. This,
however, is an iterative and dynamic process given that the understanding of the challenges
and opportunities presented by climate-related risks will improve and evolve as the guidance
provided is increasingly embedded in supervisory practices.
1.2

Related work by the SIF and IAIS

5.
Since initiating a strategic partnership with the Sustainable Insurance Forum (SIF) in
2017, the International Association of Insurance Supervisors (IAIS) has identified climate risk
1

See NGFS (2019), First comprehensive report: A call for action, Climate change as a source offinancial risk; and BIS / Banque de France (2020), The green swan, Central banking and financial
stability in the age of climate change.
2
See Access to Insurance Initiative (A2ii), https://a2ii.org/en/knowledge-center/climate-riskdisasterinsurance.
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and sustainability as a strategic focus. In July 2018, the SIF and the IAIS released a joint
Issues Paper on Climate Change Risks to the Insurance Sector (“2018 Issues Paper”). As afollow-up, the SIF and IAIS published a second Issues Paper in February 2020 on the
Implementation of the Recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD) (“2020 Issues Paper”). 3
1.3

Proportionality

6.
IAIS Application Papers should be read in the context of the proportionality principle,
as described in the Introduction to ICPs: “Supervisors have the flexibility to ta ilor theirimplementation of supervisory requirements and their application of insurance supervision toachieve the outcomes stipulated in the Principle Statements and Standards.” 4 When reading
the advice, illustrations, recommendations and examples of goo d practice provided in thisPaper, it is important to keep proportionality in mind. Where appropriate, this Paper provides
practical examples of the application of the proportionality principle.
1.4

Terminology

7.
In this Application Paper, all terms have the same meaning as set out in the IAIS
Glossary and the Introduction to the ICPs. To facilitate the understanding of the Paper,
definitions of terms that are used frequently and are not part of the IAIS Glossary, are shownin the table below.
Table 1: List of climate-related terms
Term

Definition

ClimatechangeThe warming of the world’s climate system, including its atmosphere,
oceans, and land surfaces.

Sustainability
risk

Risks associated with environmental, social or governance (ESG)
factors.
Climate-related and other environmental risks are a subset ofsustainability risks.

Climaterelated risk /climate risk

Risk posed by the exposure of an insurer to physical, transition and/or
liability risks caused by or related to climate change.
These terms are used interchangeably in this Paper.

Environmental Risks posed by the exposure of an insurer to activities that may
risk
potentially cause or be affected by environmental degradation.

3

The 2018 and 2020 Issues Papers are available at https://www.iaisweb.org/page/supervisorymaterial/issues-papers/.
4“Implementation - proportionality allows the ICPs to be translated in to a jurisdiction's supervisory
framework in a manner appropriate to its legal structure, market conditions and consumers.
Application - proportionality allows the supervisor to increase or decrease the intensity of supervisionaccording to the risks inherent to insurers, and the risks posed by insurers to policyholders, theinsurance sector or the financial system as a whole. A proportionate application involves using a variety
of supervisory techniques and practices that are tailored to the insurer to achieve the outcomes of the
ICPs. Such techniques and practices should not go beyond what is necessary in order to achieve their
purpose.”PublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
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Liability risk

The risk of climate-related claims under liability policies, as well as direct
actions against insurers, for failing to manage climate risks.

Physical risk

Risk arising from increased damage and losses from physicalphenomena associated with both climate-related trends (eg changing
weather patterns, sea level rise) and events (eg natural disasters,
extreme weather).

Transition risk Risk arising from disruptions and shifts associated with the transition toa low-carbon economy, which may affect the value of assets or the costsof doing business.
1.5

Scope

8.
Climate-related risks may affect the supervision of insurers in many ways. Therefore,
an Application Paper on this topic could theoretically deal with a great number of ICPs. For
the purpose of focusing the content of the Paper, the following ICP topics are in scope:






ICP 9 (Supervisory Review and Reporting);
ICP 7 (Corporate Governance);
ICP 8 and 16 (Risk Management);
ICP 15 (Investments); andICP 20 (Disclosures).

9.
The ICPs listed above all contain ComFrame standards (Common Framework for theSupervision of Internationally Active Insurance Groups (IAIGs)), with the exception of ICP 20.
ComFrame builds on, and expands upon, the high-level standards and guidance set out in the
ICPs. The ICPs generally apply to the insurance sector as a whole, both on a legal entity andgroup-wide level, and both to primary insurers and reinsurers. The primary aim of this Paper
is to provide guidance for supervisors in implementing the ICPs.
10.
The SIF and IAIS recognise that several ICPs, not in scope for this Paper, do haverelevance for assessing and mitigating climate-related risks. These may be covered in future
work, or are already covered by other work and include:

ICPs 14 and 17 (Valuation and Capital requirements): Since ICPs 14 and 17 arescheduled to be revised in the coming years (during the monitoring period of the
Insurance Capital Standard Version 2.0), developing an Application Paper related tothese ICPs at this time would not be appropriate;
ICP 19 (Conduct of business): Conduct of business is especially relevant in terms ofpossible reputational risk and the risk of “green washing”. 5 Inclusion of ICP 19,
however, does not naturally fit with the other identified topics, which instead all relate
to prudential supervision. For the purpose of this Paper, it is therefore out of scope;andICP 24 (Macroprudential supervision): Climate change has system-wide implications.
Supervisory (macroprudential) stress testing is one tool to measure the potential
impact of climate change on the insurance sector as a whole. At the time of this Paper’s
development, the IAIS is also developing an Application Paper specifically dealing withICP 24; therefore, this ICP is not in scope. That Paper provides examples of the various

5Greenwashing refers to the process of conveying a false impression or providing misleading
information about how a company's products or services are more environmentally sound, eg spending
more on the marketing around it than on actually reducing its environmental impact .
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macroprudential tools that a supervisor may use, many of which are helpful to assessclimate-related risks.
11.
Another important area not in scope relates to the availability and affordability of
insurance due to an increase in weather-related events and natural catastrophes. To reduce
its exposure to climate-related risks, an insurer may take a number of actions, including to:stop offering insurance to a certain group of policyholders; significantly increase premiums;
lower policy limits; or exclude cover for specific perils and/or promote risk reduction measuresby policyholders. While justifiable from a microprudential perspective, some actions taken may
potentially introduce undesirable socio-economic results in the near-term. New forms of
public-private partnerships are emerging that can help jurisdictions absorb the financial
consequences of catastrophic weather-related events. Supervisors can act as a bridge andcommunication catalyst between policymakers, the insurance industry and consumers. Bodies
such as the Insurance Development Forum (IDF) and the Access to Insurance Initiative (A2ii)
are actively engaging insurers and supervisors in this area.6

2

Role of the Supervisor

12.
As noted in the Introduction, climate-related risks are a source of financial risk, which
may translate into prudential risks to insurers – ie may affect the resilience of insurers (seeTable 2). It is recommended that supervisors assess the extent to which climate-related risks
are likely to be material to insurers operating in their jurisdiction and to determine how theserisks may be transmitted to their economies and financial sectors more broadly. 7 Supervisors
should identify how climate-related risks are relevant to their supervisory objectives. In recent
years, some supervisors have expanded their objectives to include sustainability.
Table 2: Climate-related risks and selected prudential risks
Prudential risks

Potential impact from climate change

Investment risk

The value of an insurer’s investment portfolio may be affected if
invested in sectors or assets, which may be at risk from either
physical or transition-related factors.

Liquidity risk

A lack of reliable and comparable information on climate-sensitive
exposures could create uncertainty and cause procyclical market
dynamics, including fire sales of carbon-intensive assets, andhence reduce liquidity of these markets.
In addition, the uncertainty in future experience that may result
from climate change could lead to a volatile claims experience.
This may, in turn, lead to inadequate liquid resources and thepotential need to dispose of assets on unfavourable terms.

Operational risk

Physical climate impacts may affect the insurer’s own assets(including property, equipment, IT systems and human resources),
leading to increased operating costs, inhibited claims management

6

See https://www.insdevforum.org/ and footnote 2 for the link to the A2ii website.
For a further elaboration on how climate-related risks and environmental risks may translate into risks
for the financial sector and real economy, see NGFS (2020), Guide for Supervisors on Integratingclimate-related and environmental risks in prudential supervision
7

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capacity, or potentially stoppages of operations. It may also impact
outsourced activities.
Reputational risk

Negative publicity may be triggered by insurers underwriting, orinvesting in, sectors perceived as contributing to climate change.
This is exemplified by social movements calling for divestment
from fossil fuels and the cessation of underwriting of coal-fired
power infrastructure. Further, reductions in affordability oravailability of insurance cover as insurers respond to climate risk
may also lead to negative reputational impact, for instance if
insurers are perceived to increase prices substantially or withdraw
coverage to certain counterparties without there being anappropriate alternative.

Strategic risk

Physical or transition-related climate events, trends anduncertainty about future scenarios may present strategic
challenges to insurers, which could inhibit or prevent an insurer
from achieving its strategic objectives.

Underwriting risk

Climate change increases the frequency, severity andconcentration of weather-related insurance claims, as well as thelevel of variability. If the impact of climate change is not properly
accounted for, underwriting may underestimate the risks to which
an insurer is exposed in writing a particular insurance policy.
Additionally, liability policies may also give rise to prudential
impacts through underwriting risk.

Sources: 2018 IAIS/SIF Issues Paper and Network for Greening the Financial System (NGFS)(2020).
2.1

Preconditions and resources

13.
As highlighted in the ICP Assessment Methodology, 8 an effective system of insurance
supervision requires a number of preconditions to be in place. Although normally outside thecontrol or influence of the supervisor, such preconditions can be taken into account in thedevelopment of supervisory practices as they relate to climate -related risks. The following
categories of preconditions may be of particular relevance:





8

Sound and sustainable macroeconomic and financial sector policies, eg the
introduction of a globally-agreed carbon pricing system;
A well-developed public infrastructure, eg the existence of levees against rising sea
levels as part of adaptation programmes, or the existence of strong building codes thatfacilitate sustainable structures;
Efficient financial markets, eg the adoption of a globally accepted framework forsustainability standards; orEffective market discipline in financial markets, eg the extent to which non -financial
private sector participants have implemented climate-related disclosures, and theexistence of independent sustainability ratings that are comparable, reliable andaccessible.

See https://www.iaisweb.org/page/supervisory-material/insurance-core-principles-and-comframe

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As indicated in paragraph 53 of the Assessment Methodology, where shortcomings exist, thesupervisor should make its government aware of these and their actual or potential
repercussions for the achievement of supervisory objectives and seek to mitigate the effectsof such shortcomings on the effectiveness of supervision.
14.
Sufficient resources are important to enable effective supervision (see ICP 2(Supervisor)). In terms of a rapidly evolving risk, such as climate risk, this entails providing
adequate training opportunities for supervisory staff. As capability to assess climate risk is stilldeveloping, supervisors may find it of assistance to use external resources, including materials
produced by international organisations (eg the Network for Greening the Financial System(NGFS), A2ii, IAIS and SIF) or collaborate with external stakeholders (eg Non -Governmental
Organisations, think-tanks, government departments, environmental and climate science
experts and/or financial sector participants).
15.
Different approaches may be used to embed climate risk into the organisation of thesupervisor. The NGFS distinguishes between three approaches that could be considered,depending on the circumstances:Internal network approach: establishing flexible structures such as internal networks,
which can promote knowledge sharing and improve coordination. This structure would
typically involve staff from different departments for which climate risk is only part oftheir responsibilities, and hence is least resource-intensive;
Hub and spoke approach: putting in place a central team or unit working full-time on
climate-related risks and one or more contact persons in each of the relevant
departments to facilitate feedback loops and dissemination of information across thesupervisory authority; or
Dedicated unit approach: creating a dedicated unit as the main source of generalexpertise on climate risk, with the mandate to coordinate issues related to climate
and/or sustainability across all departments.

16.
For example, the French Autorité de Contrôle Prudentiel et de Résolution (ACPR) has
set up a sustainable finance network in order to exchange information regularly between it andthe central bank. The German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
established an internal sustainable finance network, which facilitates information exchange
across the different sectors and helps achieve a consistent approach. The Bermuda Monetary
Authority (BMA) has a standing, internal working group on ESG issues that has dedicated subprojects with clear overarching targets beyond collaboration and information exchange. The
Bank of England’s Prudential Regulation Authority (UK PRA) set up a Climate Hub to lead on
the Bank’s policy response to the risks from climate change and embed climate risk within the
supervisory approach. The Hub takes a strategic and coordinating role and, in collaboration
with the various directorates, contributes to the Bank’s involvement in national andinternational initiatives. Finally, Bank Negara Malaysia (BNM)’s climate strategy is supported
by internal workstreams across different aspects of central banking – namely supervisory,
regulatory, macrosurveillance, monetary policy and treasury operations as well as the Bank’s
own operations. A regulator-industry platform has been formed to drive and support readinessof the financial sector in managing risks associated with climate risk and in supporting thetransition to a low carbon economy.

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2.2

Supervisory review and reporting17.
ICP 9 (Supervisory Review and Reporting) focuses on the gener al processes andprocedures supervisors should have in place with respect to supervisory review and reporting.
ICP 9 therefore provides for a natural starting point for supervisors who want to integrate
climate-related risks into their supervisory framework, in terms of integrating this into
supervisory plans, obtaining the necessary qualitative and quantitative information on climaterelated risks and methods for supervisory feedback and follow-up.
18.
Guidance in ICP 9.1 notes the need for the supervisory re view and reporting
framework, including the supervisory plans, to be reviewed and take account of evolving risks.
It is clear that climate risk is an example of such an evolving risk and should be considered.
As indicated above, the starting point would be the assessment of the materiality of climaterelated risks to individual insurers and the insurance sector as a whole. Common practice isfor supervisors to assess the impact of climate change on other prudential risk classes rather
than as a separate risk category (see Table 2 for examples).

2.2.1 Information gathering and sharing
19.
For a proper assessment of the risks, supervisors should have quantitative andqualitative information on the exposure to physical, transition and liability risks and on climate
risk management (see Box 1 for illustrative examples). Relevant public data may come from
TCFD-aligned disclosures or reporting in line with the UN Principles for Responsible
Investment Initiative. Relevant information from existing reporting requirements may comefrom evaluating an insurer’s business strategy or risk management and governancedocumentation, detailed data on asset exposures, or outcomes of stress and scenario testing
exercises.
20.
It should be acknowledged that there are significant limitations to data availability andcomparability of existing climate-related reporting and disclosures. As per ICP 9.4, thesupervisor “requires more frequent reporting and/or additional information from insurers asneeded”. To assess climate risks, many supervisors have found it useful to collectsupplementary information on an ad hoc basis such as through surveys and targeted requests.
This allows for a rapid and iterative approach to gathering information. Given the importanceof understanding this risk, the supervisor should decrease its reliance on ad hoc information
requests and gradually move towards integration of climate risk information needs into theregular reporting requirements.
21.
Information sharing and cooperation on climate-related risks by supervisors both
domestically and on a cross-border basis are crucial.9 Within the same jurisdiction, this may
involve cooperation and information sharing through Memorandum of Understandings or othermechanisms with supervisors in other sectors and between conduct and prudential
supervisors. As it relates to cross-border supervision of insurance groups, such cooperation
can be done through existing mechanisms, such as the IAIS Multilateral Memorandum ofUnderstanding (MMoU). Supervisory colleges may discuss, for example, the use of natural
catastrophe models and assumptions to account for climate change, including in stressscenarios. Such information sharing and cooperation should help support a consistent, groupwide assessment of the risks posed to the group as a whole, including by considering
9

Information sharing and cooperation with other involved supervisors is subject to confidentiality
requirements (see ICP 3 (Information Sharing and Confidentiality Requirements)).
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aggregate risk exposures, peer-group analysis and other relevant supervisory tools (seeComFrame integrated in ICP 9.2). Cross-border and cross-sectoral cooperation onsupervisory review and reporting may also help streamline information gathering and avoid
insurers being confronted with multiple information requests from several involved
supervisors.

2.2.2 Supervisory feedback and follow-up
22.
Given the rapid evolution of this risk, clear two-way communication between the
supervisor and the supervised entities is essential. Such communication also helps to better
understand the challenges faced by insurers and find adequate long -term solutions to
overcome them. Supervisors typically use a combination of sector-wide and insurer-specificcommunication approaches to increase awareness and promote transparency around thesupervisor’s expectations of the insurer’s approach to climate -related risks. The supervisor
may also host workshops for the financial and/or insurance sector to exchange informationand promote awareness.
Box 1: Illustrative examples of relevant indicators
Examples of relevant indicators and sources of information that supervisors may consider
asking insurers, inter alia based on guidance published by the SIF and United States
National Association of Insurance Commissioners (US NAIC), 10 include:
Qualitative questions:
GeneralWhat are the environmental, economic, social, political, technological, or
reputational risks and opportunities related to climate change that are relevant foryour business?
Has your organisation implemented or planned any substantive changes to its
business model, strategy and/or risk appetite in response to current and potential
future climate-related risks?
Does your organisation have a strategy to address climate change?
Are there governance structures in place in your organisation through which Board
Members may have oversight over climate-related risks? Is there a specific Board
Member identified to deal with these risks?

Physical risk




10

Does your organisation expect that physical risks will materially affect businessperformance, in terms of market demand, claims experience, or other factors?
Does your organisation expect that physical risks will materially affect the valuationof financial assets in your investment portfolio, and how do you expect these risks
to materialise over the short, medium, and long-term?
Does your organisation directly or indirectly incorporate climate-related factors into
the pricing and underwriting of insurance products?

See also: SIF (2020), Question Bank on Climate Change Risks to the Insurance Sector;
 NAIC (2013), Financial Condition Examiners Handbook (which was updated to reflect climatespecific aspects, including templates to be used as a starting point when interviewing an
insurer).

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Transition riskDoes your organisation expect that transition risks will materially affect underwriting
business performance, in terms of market demand, claims burden, or other factors?
To what extent does the investment strategy include climate-related
considerations, and does the insurer comply with its stated strategy?

Liability risk

Has there been a legal judgement awarded in your jurisdiction relating to liability
for climate change damages?
Does your organisation consider that it may be directly or indirectly expos ed toliability risks stemming from climate change, either now or into the future?

Quantitative information:
General

Carbon-intensity of sectors for both asset and liability exposures; or
ESG/climate scoring, if available (internally developed or from third parties).

Physical risk






The vulnerability to climate change by jurisdiction, for instance according to theNotre Dame Global Adaptation Initiative (ND-GAIN) Index or Standard & Poor’s
methodology;
Percentage of power plant locations that are exposed to various levels of water
stress, flood, and wildfire risks (eg from Paris Agreement Capital Transition
Assessment (PACTA) model);Exposure to flood risk, or exposure of real estate investments to perils;
Agricultural insurance with exposure to drought, variations in weather patterns andother climate change impacts; andOutputs from catastrophe models.

Transition riskDistribution of energy performance labels in insurers’ commercial real estate and/or
residential real estate portfolios;
Carbon intensity ratings of various assets and proportion of assets that are exposed
to carbon intensive industries; andImplied warming of the portfolio such as through the PACTA model.

Liability risk




3

General insurance for coal, oil and gas energy operations with exposure to climate
litigation;
Portfolio of relevant insurance liability covers such as for Directors and Officers;
andProfessional liability insurance with exposure to climate litigation, such asarchitects' professional liability risks for a new commercial development that did not
anticipate the increased risk of flooding.

Corporate Governance23.
ICP 7 (Corporate Governance) sets out requirements for the establishment andimplementation of a corporate governance framework. This section looks at oversight andPublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
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management responsibilities, business objectives and strategies, the role of the Board, duties
related to risk management and internal controls, as well as remuner ation through a climate
risk lens (ICP 7.1, 7.2, 7.5 and 7.6). ICP 7 also discusses issues around supervisory review
and communications, but these are covered in sections 2 and 6 respectively.
3.1

Appropriate allocation of oversight and management responsibilities

24.
Given that climate risk is an evolving risk area, the relevant roles and responsibilities
assigned to the Board, Senior Management and Control Functions should continue to adapt.
This includes the need to have greater clarity on information and reporting n eeds (quantitative,
qualitative), resourcing, skill sets and budgets. By assigning responsibility, there is greater
accountability for mapping, monitoring and controlling the risk. In this way, an insurer obtains
a more accurate picture of how climate risks affect their business and how these mightevolve. That might lead insurers to adapt their risk management (and potentially governance)in light of new information. The Application Paper on Proactive Supervision of Corporate
Governance can help supervisors identify governance-related issues in terms of managementof climate-related risks.11
25.
One way some insurers address evolving risks, including climate risk, is to have aninternal risk committee that has the objective of identifying the changing risk landscape as wellas potential ways to address the risk. Supervisors may want to encourage insurers to establish
such a committee or other suitable structures with appropriate expertise, if they do not haveone already.
26.
The evolution of climate risk governance is reflected in some jurisdictional examples.
In Canada, one insurer recently created the Chief Climate Risk Officer role, responsible forassessing the financial exposures related to climate risk in its insurance portfolio as well as
systemic impacts. The United Kingdom Prudential Regulation Authority (UK PRA) requires
insurers to identify a person holding a Senior Manager Function to hold this responsibility, forthis to be detailed in their Statement of Responsibilities and performance reflected in theindividual’s variable remuneration, including via the application of r isk adjustments.
3.2

Business objectives and strategies of the insurer

27.
Insurers should incorporate and assess climate-related risks as part of the annual
financial planning as well as the long and short-term strategic planning processes. Insurers
should also ensure that impacts of climate change are well-represented in existing risk
categories. It is important for insurers’ strategic planning periods to build on the risks of theirinsurance portfolio.
3.3

The role of the Board

28.
The Board has a role in maintaining effective oversight of climate-related risk
management, including incorporating climate-related considerations into the insurer’s risk
appetite, strategies and business plans. In executing this responsibility, the Board should
consider the potential threat to the insurer's own business risks, the fair treatment of customers
and the duty of the insurer to conduct its business in a socially responsible manner.

11

See https://www.iaisweb.org/page/supervisory-material/application-papers/file/80572/applicationpaper-on-proactive-supervision-of-corporate-governancePublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
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29.
There should be appropriate understanding of, and opportunity to discuss, climate risk
at the Board and Board committee levels, including within the audit committee and the risk
committee.
30.
In order to enhance the skillset amongst its Board Members, insurers should takeactions to facilitate the understanding and discussion of climate risks at Board and B oardcommittee levels and, where necessary, provide appropriate training for Board Members.
Additionally, the Board succession or Board renewal plans could be used as a way to help
add skills and understanding on climate risk to the Board, if needed.
3.4

Duties of Senior Management

31.
Senior Management is responsible for implementing the policies related to climate risk
and/or incorporating climate risk related elements into relevant operational and business
policies. The Board relies on Senior Management to provide advice on the organisational
objectives, plans, strategic options and policies as they relate to climate risk, including theestablishment and use of relevant tools, models and metrics to monitor exposures to climaterelated risks. Senior Management should set out information, options, potential trade-offs andrecommendations to the Board in a manner that enables the Board to focus on key issues andmake informed decisions in a timely manner, as it relates to climate risk.
3.5

Duties related to remuneration

32.
The alignment of remuneration with prudent risk-taking should take into consideration
climate-related risks, as appropriate, since risk adjustments should account for all risk types
relevant to the insurer.
33.
Remuneration can be used as one of several incentives to integrate climate-relatedrisks in the risk management system. As part of this, criteria used to calculate the amount ofvariable remuneration could include, among others, climate -related risk management within
the insurer (eg through staff training or asset categorisation and performance). Also, theevolution of the non-financial performance of investee companies could be a relevant indicatorfor variable remuneration.

4

Risk Management and Internal Controls

34.
ICP 8 (Risk Management and Internal Controls) sets out requirements on systems ofrisk management and internal controls, including of the Control Functions. This section
provides guidance on how supervisors could integrate climate -related risks into theirsupervisory expectations around the risk management system (ICP 8.1), and for each of theControl Functions (ICP 8.3 – 8.6). Finally, it discusses the supervision of outsourced functions
in relation to climate risks (ICP 8.8). Box 2 provides examples of supervisory practices relating
to ICP 8.
35.
When addressing climate-related risks, it is expected that insurers integrate these risks
into the overall corporate governance framework, which includes the systems of risk
management and internal controls. It is recommended that those insurers still using anapproach that mainly addresses climate change from a reputational risk perspective 12transition to a more fully integrated approach that considers the risks more holistically12

Often referred to as a “Corporate and Social Responsibility” approach.

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(including not only the reputational aspect, but also the impact on assets, liabilities and theoverall business model).
4.1

Integrating climate-related risks into the scope of the risk management
system36.
Climate risks relate to existing risk categories and affect the valuation of an insurer’s
assets and liabilities as well as its business plan and strategic objectives. Life insurers, inparticular, may incur increased losses due to an increase in the mortality rate from climate
events like heat waves (eg impact on term life products) or , in some areas of the world, anincrease of longevity due to more moderate temperatures (eg impact on annuity products).
Non-life insurers may be affected by the increased frequency and severity of natural
catastrophes on their products, such as property insurance, transport insurance or liability
insurance. Transition risks manifest, for instance, through a decrease in the value of assets
affected by ecological transition and may result in “stranded assets”. Stranded assets relate
to sectors likely to shrink due to measures taken to transition to a low-carbon economy (egincrease in carbon pricing) or to a shift in consumer or investor’s preferences (eg away from
air transport). In addition, climate change may affect the correlation between different risk
categories (eg insurance and investment risk), which can lead to gaps between the actual risk
exposure and the expected one. It also may be important for insurers to consider whether
pricing bubbles appear as investors move into green assets.
37.
Given the potential impact of climate-related risks on an insurer’s solvency position, it
would be expected that such impact is considered within the existing categories of risks andleads to a review of the risk management system in case of material change in these risks.
This means that the insurer should assess and document in its risk management policies how
climate-related risks could materialise within each area of the risk management system, inparticular, in the investment and underwriting policies, taking into account potential risk
mitigation measures and the speed at which risks may manifest over time38.
In order to identify, monitor, assess and manage climate-related risks, as well as theirinteraction with other identified risks, insurers should develop tools to collect reliable
quantitative and qualitative data. This also allows the insurer to perform aggregated analysis
of various elements of climate-related risks. The measurement of climate-related risks is an
evolving science with challenges in the quality and availability of data. In some cases , there
may be challenges to translating climate change (scenarios) into financial risks (eg translatinga change in temperature into certain natural catastr ophe risks). Nevertheless, there is an
expectation that insurers’ quantitative and qualitative analysis will continue to develop andevolve along with the science and improvements in data quality.
39.
The potential impact on business continuity due to climate change should beconsidered in the risk management system.
4.2

Consideration of climate-related risks by the Control Functions

40.
In performing its duties, Control Functions should take proper consideration of the
impact of climate change on the existing risk categories and should have the appropriate
resources and expertise to support that. As the measurement of climate -related risk is an
emerging science, and risk modelling continues to develop and evolve, Control Functions willneed to continue developing appropriate tools and approaches.

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41.
The Control Functions should identify, measure, and report on the insurer’s risks,assess the effectiveness of the insurer’s risk management and internal controls, anddetermine whether the insurer’s operations and results are consistent with the risk appetite as
approved by the Board.
4.2.1 Risk management function
42.
The risk management function should monitor and facilitate the proper identification,assessment and management of climate-related risks. This should be integrated into theexisting risk management system and in line with the Board-approved risk appetite statement.
The following risk management areas may be particularly affected by climate -related risks:
asset-liability management (ALM), investment risk management, underwriting and reserving,reinsurance and other risk-mitigating techniques, operational risk and reputational risk
management.
43.
The risk management function should use a range of quantitative and qualitative
methods and metrics to monitor progress against the insurer’s overall business strategy andrisk appetite, and promote consistency within the insurer. For instance, the underwr iting andinvestment functions should consider where they could benefit from aligned criteria whenidentifying sectors that are more exposed to climate change. The methods and metrics should
be updated regularly to support decision making by the insurer’s Board and/or relevant
committees.
44.
An example of a method for managing the risk associated with climate change isdefining investment limits to specific companies, sectors, regions, jurisdictions, etc. This may
be based on certain criteria, such as the percentage of income stemming from mining,processing or burning fossil fuels. Furthermore, insurers could incorporate environmental andclimate change considerations when evaluating a proposed investment. On the liability side,risk limits could also be defined – for instance a maximum exposure to policyholders in coastal
areas in order to limit the risk exposure to flood risk. The use of “heat maps” or ESG scoringthat highlight climate-related risks may also be a helpful method to get a better understandingof, and monitor, the impact of these risks.
4.2.2 Compliance function
45.
The compliance function should then identify the compliance risks that the insurer
faces and the steps taken to address them. In performing this task, the compliance function
should take into account the liability and reputational risks (eg from a failure to appropriately
disclose information on climate-related exposure) stemming from climate change.
Accordingly, the compliance function should ensure that internal policies and internal control
procedures are compliant with the relevant standards, directives, charters, or codes of conduct
related to climate change that the insurer is obliged or committed to respect.
4.2.3 Actuarial function
46.
It is expected that the actuarial function takes into accoun t climate-related risks
because they can potentially have an impact on the valuation of assets, ALM, underwriting,risk mitigation and on the calculation of insurance liabilities and capital requirements. To
assess physical risks, the actuarial function could, for example, consider the impact of windand storm pattern shifts, increased frequency of hot weather, hail, high winds, extreme
precipitation, drought and flooding. To assess transition risks, the actuarial function could
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consider the insurer’s exposure to companies likely to be affected by a transition to a carbonneutral economy.
47.
In performing its duties, the actuarial function should pay particular attention to theassessment of the quality and completeness of underlying data. Due to climate change,
historical analysis may not be sufficient and may need to be supplemented to enable theappropriate calibration of premiums or reserves to reflect climate -related risks. Expert teams,
such as cat modelling teams, can reinforce the actuarial function’s r ole, as these teams areoften already using analytical tools that go beyond pure historical analysis.
4.2.4 Internal audit function
48.
The internal audit function should review the risk management process to ensure it isadequate and effective. As part of the review, it should assess whether all material risks,
including climate risk, that may have an impact on insurer’s resilience, are being considered
and, where relevant, mitigated.
4.3

Fitness and propriety of Control Functions on climate-related issues

49.
In order to ensure sufficient knowledge for the Control Functions while identifying,assessing, monitoring, managing and reporting climate-related risks, insurers should adapt
their internal policies and implement training programmes to ensure they have a sufficientunderstanding of climate-related issues and their impact on the risk-profile of the entity.
Insurers should ensure that persons who perform Control Functions have relevant experiencein understanding the risks of climate change as appropriate to their respective duties.
50.
As an example, the European Insurance and Occupational Pensions Authority(EIOPA) deems that “depending on their (the insurer’s) specific investment strategy, their risk
profile and their size, the recruitment of dedicated experts may be need ed for someundertakings. In any case, insurance and reinsurance undertakings should be requested tobuild in the necessary expertise with particular consideration of the proportionality principle”.
Furthermore, in the Netherlands, De Nederlandsche Bank (DNB) issued guidance on including
climate-related risks into the fit and proper assessments of management or supervisory Board
members and other policymakers (see Box 2).
51.
Within the various Control Functions involved, a person with appropriate skills andknowledge in climate-related risks, or a dedicated unit, may be identified as primarily
responsible for climate-related aspects in order to ensure that climate-related risks remain in
scope and the necessary attention is allocated. However, this does not remove the need tointegrate the risks from climate change into all relevant parts of the business.
4.4

Integrating climate-related risks in outsourcing decisions

52.
Insurers that decide to outsource any material activity should preserve the ability to
manage risks and ensure the continuity of their activities in case of a failure of the outsourcing
provider. One example is physical damage that could disrupt the insurer’s operations, should
severe weather events affect the premises of their outsourced business functions. To manage
such physical risks, business continuity plans should incorporate the risks from climatechange, where material. It may also be useful for insurers to conduct scenario analyses, forinstance considering a scenario in which several outsourced business functions are affected
at once. In practice, some insurers with outsourced functions have used physical risk
scenarios such as those published by the Intergovernmental Panel on Climate Cha nge
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(IPCC). Insurers may increasingly include insured loss data as part of this analysis, as well as
examining recent historical climate trends in key locations.
Box 2: Examples of supervisory practice on Corporate Governance, Risk Ma nagement
and Internal Controls
Germany
BaFin published a Guidance Notice on Dealing with Sustainability Risks 13 that considers
details of strategies, responsible governance and business organisation. BaFin
recommends a strategic assessment of sustainability risks. The management Board
should have overall responsibility for the business and risk strategy and its communicationand implementation within the entity, as well as for maintaining an appropriate businessorganisation with the responsibilities, processes, resources and functions to address therisks.
The central focus of the Guidance Notice is risk management. It considers risk
identification, management and control processes together with traditional methods andprocedures, with specific reference to sustainability risks. It also highlights specific features
relating to insurance. In addition, the Guidance Notice considers issues regarding stresstests including scenario analyses. Finally, BaFin takes a stance on questions relating tooutsourcing, group issues and the use of sustainability ratings.
Japan
Given recent significant loss experience from natural disasters among Japanese insurers,
the Japan FSA has conducted thematic reviews on natural disaster risk management for
non-life insurers. The reviews include retention and reinsurance strategy, groupreinsurance policy, claim management, protection gap among small and medium-sizedenterprises for water-related disasters and risk amount of large natural disasters. Climaterelated risk was added to the themes of the review for 2020-2021 and Japan FSA has
begun discussions with insurers regarding risk management related to climate changes.
In December 2020, an Expert Panel on Sustainable Finance was set up to discuss broader
contexts of sustainable finance including managing climate-related risks. Outcomes of
discussions are expected by mid-2021.
The Netherlands
Effective 2021, climate-related and environmental risks have become a standard part of
DNB’s fit and proper assessments for Board members of insurers, banks and pension
funds. This means that climate-related and environmental risks will feature more
prominently in the assessment interviews. For example, a question may be asked about
the candidate’s knowledge in the area of climate-related and environmental risks, relevant
legislation and its impact on the institution. Also DNB will ask that the institution include in
the assessment file it submits, information on the candidate's knowledge and experiencein the area of climate-related and environmental risks.
DNB also published the following list of expectations for proposed Board members withrespect to climate-related and environmental risks, thereby referring to the criteria listed
under A through E in the Policy Rule on Fitness 2012:



13

Be able to define these risks;
Be aware of relevant laws and regulations and of reporting obligations;
Be able to identify, monitor and manage them;See BaFin (2020), Guidance Notice on Dealing with Sustainability Risks.

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






Know who is responsible for managing them in the institution;
Understand their impact within the institution's specific context, and to be able tocite examples;
Be able to formulate a strategy and policies to tackle them;Take responsibility for ensuring their adequate management;
In the case of supervisory Board members: to monitor their adequate management;
andHave sufficient relevant competencies, such as a helicopter view, leadership,
autonomy, sensitivity to their environment, strategic guidance and sense of
responsibility.

The actual assessment will be proportionate, taking into account the candidate's position,
the institution's nature, size, complexity and risk profile, and the composition andfunctioning of the Board as a whole. More information can be found on DNB’s “fit andproper” assessments website under the heading Climate-related risks are now part of fit
and proper assessments.
United Kingdom
The UK PRA stipulates the following expectations for insurers and reinsurers to address
financial risks from climate change through their risk management frameworks. 14 It is
expected that insurers and reinsurers should understand the financial risks from climatechange and how they will affect their business model.
To do so, they should:





5

Develop scenario analysis and stress testing, using all possible data in addition tohistorical data (eg future trends in catastrophe modelling) to identify correctly theshort- and long-term financial risks to their business model from climate change;
Develop quantitative and qualitative tools to monitor their exposure to financial risks
from climate change exposure (eg monitor the potential impact of physical risk
factors on outsourcing arrangements and supply chains) and to monitor progressagainst their overall business strategy and risk appetite; andDefine a credible plan or policies for mitigate and managing the exposures tofinancial risks from climate change (eg any action to reduce the concentration ofthese risks such as the necessity to take into account the potential and future
impacts of the physical and transition risk factors on their clients, counterparties,
and organisations in which the firm invests or may invest).

Enterprise Risk Management for Solvency Purposes

53.
ICP 16 (Enterprise Risk Management for Solvency Purposes) sets out supervisory
expectations of how insurers coordinate their risk management, strategic planning and capitalmanagement processes. This section discusses how climate-related risks should be
integrated in an insurer’s underwriting policy and underwriting processes, as well as in the
Own Risk and Solvency Assessment (ORSA) process (with a focus on stress testing andscenario analysis). This covers Standards ICP 16.2, 16, 7 and 16.10 – 16.14. ICP 16 also

See UK PRA (2019), Supervisory Statement SS 3/19 on Enhancing banks’ and insurers’ approaches
to managing the financial risks from climate change. In July 2020, the PRA issued a Dear CEO letter
which gives a timeline of by the end of 2021 for firms to embed the PRA climate-related requirements.
14

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covers areas relating to the insurer’s ALM and investment policies, which is covered in section
6. Box 3 provides examples of supervisory practices around ORSA and stress testing.
5.1

Underwriting policy

54.
Physical, transition and liability risks arising from climate change can impact thebusiness risk profile, underwriting strategy and underwriting processes of insurers. Whenmaterial, supervisors should expect insurers to identify the relevant physical, transition andliability risks inherent in their business portfolios, assess the implications for their underwriting
strategy, and develop policies and procedures to integrate the management of these risks aspart of their enterprise risk management (ERM) framework as well as the risk appetitestatement.
55.
Insurers should consider both the short-term and longer-term (including both businessplanning horizon and duration of the policies) when assessing the impact of such risks. How
insurers consider the climate-related risks within underwriting risk is likely to be dependent onvarious elements (eg duration of the contract, frequency and severity of climate events,
localisation of the goods and persons covered, impact of perils on their policies, reinsurance
agreements, terms and conditions).
5.1.1 Consideration of climate-related risks in the underwriting policy
56.
Insurers should have internal guidance on how the assessment and monitoring of suchrisks are embedded in the underwriting process. Hence, supervisors should require insurers
to incorporate the consideration of climate-related risks in the underwriting policy, as
appropriate, given the exposure of their individual products to those risks. This may include
the description of:

Geographical areas, economic sectors 15 or lines of business that are assessed to havehigher climate-related risks;
Processes to identify and assess material climate-related risks inherent in new
business applications and in the in-force portfolio; andThe use of climate research reports, climate risk models and other analytics tools in
the underwriting decision-making process, where applicable.

5.1.2 Consideration of climate-related risks in the underwriting assessment
57.
Insurers strive to understand the potential losses from natural catastrophe events
through their use of natural catastrophe modelling and analytical tools. It is possible that overtime, insurers will also have a more precise understanding of the physical risks of climatechange. However, this requires that sufficient data becomes available to incorporate climatechange scenario analysis into their catastrophe models, which would allow for the estimationof both the likelihood of events as well as the associated potential losses.
58.
The integration of climate-related risks in the underwriting assessment may involve theenhancement of underwriting practices due to the need to consider the relevant liabili ty,
15

The evaluation criteria for such sectors may include the level of greenhouse gas emissions,
vulnerability to extreme weather events, and linkages to unsustainable energy practices, deforestationand pollution. For example, the UN IPCC has noted that sectors such as agriculture, chemicals, forestry
and mining may face material challenges due to either their impact on the environment or as a result of
the impacts related to climate change.
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transition and reputational risks. For material risks associated with climate change,
supervisors should encourage insurers to include, as relevant, their assessment as part oftheir overall underwriting assessment for each policyholder. Where relevant, the underwriting
assessment should be enhanced to consider: 16The track record and commitment of the policyholder in managing climate -relatedrisks;17
The ability and willingness of each policyholder to mitigate the identified climate -relatedrisks associated with the transaction;
The duration of the policy; andThe need to impose underwriting conditions for certain types of products 18 to requirepolicyholders that are assessed to pose higher risks due to their climate impact to takesteps to mitigate those risks.

59.
Insurers may choose to use ratings developed by external parties or develop their own
risk assessment methodology to incorporate climate-related risks in the underwriting
assessment. If an insurer relies on external ratings, it should ensure that t he rating
methodology is sufficiently transparent to allow understanding of the ratings provided. For
transactions that are assessed to involve higher climate-related risks, it may be appropriate
for supervisors to expect insurers to perform additional due diligence procedures19 to obtaina more informed understanding of the risks associated with the transaction. It may also beappropriate for insurers to incorporate climate-related risk exposures into the underwriting
authority grid, such that transactions that are assessed to involve higher climate-related risks
require internal escalation for approval.

5.1.3 Monitoring of underwriting exposure to climate-related risks
60.
Climate change is already causing changes to the frequency and severity of loss
events for some perils, which in turn may increase the risk profile of an insurer’s businessportfolio. For instance, climate change could result in changes in weather patterns that may
impact non-life products as a result of the increase in physical risks of certain geographicalareas, but will also increase the air temperature that could result in a longer-term impact
through the increase in mortality and morbidity risks. Additionally, certain non-life policies may
face increased liability risks as a result of evolving legal approaches and increased litigation
linked to climate-related risks.
61.
Hence, supervisors should encourage insurers to develop appropriate tools andmetrics to monitor their underwriting exposures to climate-related risks. Such tools and metrics
may be used, for example, to monitor underwriting exposures to and concentrations in
geographical areas or sectors that are assessed to pose higher climate -related risks (such asperil regions). This would enable insurers to take appropriate mitigating measure s to manage
16

Both historic and forward-looking considerations should be taken into account in underwriting
assessments.
17
Especially in case of material exposure to liability as well as reputational risk and where the terms
and conditions of the insurance policy do not set out mitigating obligations on the policyholder tomanage climate-related risks or the fulfilment of such contractual obligations would be difficult to verify
after a claim.
18
Such conditions may include the development of a sustainable transition strategy and the adherence
to relevant environmental certification standards.
19
Such procedures may include on-site visits to the policyholder or risk location or external expert
review.
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any potential build-up in concentration of exposures to geographical areas or sectors withhigher climate-related risks.
5.2

Own Risk and Solvency Assessment (ORSA)

62.
The unique business strategy, investment portfolio and risk profile of each insurer willaffect the degree of impact arising from climate-related risks. The nature and materiality of therelevant insurance, credit, market, concentration, operational and liquidity risks will varydepending on the exposure to climate change of each insurer. Hence, the ORSA is aparticularly useful tool for insurers to assess the adequacy of their ERM and capital position.
Supervisors should expect insurers to consider all material physical, transition and liability
risks arising from climate change in its ORSA process, and adopt the appropriate risk
management actions to mitigate the identified risks accordingly. Insurers may consider therisks on both a qualitative and quantitative basis, with the understanding that quantitative
capabilities should improve over time as the ability to access the necessary data is improved.
63.
As part of the ORSA, the insurer assesses its risk management and financial resources
over a longer time horizon than used to determine regulatory capital requirements. The time
horizon should be consistent with the nature of the insurer’s risks and business planning.
Some climate-related risks may take longer to fully materialise and, therefore, it would be
expected that the ORSA also include appropriate scenarios that use a more ext ended time
horizon, where relevant. When assessing the appropriateness of time horizons used byinsurers, supervisors should consider the nature and types of business written by the insurer.
5.2.1 Stress testing and scenario analysis of climate-related risks64.
As part of the ORSA, an insurer is required to perform a continuity analysis to assess
its ability to manage its risks and meet its capital requirements under a range of plausible
adverse scenarios with a forward-looking perspective in mind. When material, this analysis
should include the identification and assessment of the direct and indirect impact of climate related risks. For instance, including as part of the scenario analysis a (reverse) stress testingprocess. This would enable insurers to assess their resilience to financial losses with respect
to climate change. This process should incorporate an assessment of physical, transition andliability risks:Assessment of physical risks includes the use catastrophe modelling including a
number of different scenarios (eg 1-100 to 1-500 or 1-1000 year events). This may also
include the identification of a climate-related risk scenario that could potentially cause
insolvency;
Assessment of transition risks may cover how increases in carbon taxes, stricter
environmental regulations and a low-carbon economy would impact both assets andtechnical provisions; andLiability risks assessment involves the risks resulting from potential changes insocietal, litigation and judicial environments. Insurers offering claims-made policies
should have an understanding of the potential impact on their liability risks as a resultof increasing pressure on Boards to manage their companies in a responsible manner,
especially as it relates to the environment, and should consider appropriate exclusions
and/or limits.

65.
Parameters and assumptions for climate-related stress testing scenarios may be
adopted from modelling work performed by meteorological agencies, regulators or otherexternal experts. For example, there are statistical models to determine the frequency of
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flooding events, and modified economic models to estimate the economic or financial impact
of various climate shocks. Alternatively, insurers may have developed internal models for the
impacts of climate risk. Supervisors should encourage insurers to use models that are
pertinent to their geographical scope and nature of business. It is important for insurers to fully
understand these models, the uncertainties of the results and their underlying assumptions
and methodologies when deciding on their relevance.
66.
Climate-related risks are material to the insurance industry and are expected topotentially have an impact on all insurers; therefore, these risks should be considered forinclusion in the ORSA. If climate-related risks are assessed to be immaterial by an insurer,
the insurer should document the reason for the assessment. The rationale for immateriality
could be included in the documentation that summarises the risks that the insurer considered
for incorporation in the ORSA and may be concise.
Box 3: Examples of supervisory practice on ORSA and stress testing
CanadaIn Canada, certain IAIGs have included a climate risk scenario in stress testing in the last
two years. In 2019, this included both first-order impacts (loss of value in physical assets
in high-risk flooding regions) and second-order impacts on the asset portfolio due to a shift
to green industries and reduced market value of securities related to fossil fuelsbusinesses.
Furthermore, in 2021, the Bank of Canada and the Office of the Superintendent of Financial
Institutions (OSFI) will undertake a pilot project to use climate-change scenarios to better
understand the risks to the financial system related to a transition to a low-carbon
economy. A small group of institutions from the banking and insurance sectors will
participate voluntarily in the project. Participants will be asked to explore the potential risk
exposures of their balance sheets to climate-change scenarios that are relevant for
Canada. A report is planned to be published end 2021.
Chinese Taipei
The Financial Supervisory Commission (FSC) has required insurers to assess the impact
of climate change in the 2020 ORSA Supervisory Report, including risk identification ofclimate change, major risk exposure status, risk assessment methods and related
response strategy.
The FSC requires insurers to identify and assess the aspects of climate change and thedegree of impacts, including physical risks, transition risks and liability risks, in the 2021
ORSA Supervisory Report. The insurers should disclose the difficulties, limitations andchallenges faced by the insurers when they conduct climate change risk management.
Also, the ORSA Supervisory Report should include the related re sponse strategies toclimate change risk management.
Regarding the stress test, in addition to the existing scenarios of catastrophes, the FSC
has adding climate change scenarios, including the associated losses related to typhoons,
into the current overall stress test scenarios to assess the impact on insurers and otherassociated losses.
The Netherlands

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In its Good Practice and Q&A document, 20 DNB formulates principles on how insurers
should integrate climate-related risks in the ORSA based on the outcomes of an analysis
of ORSAs submitted in 2018. These are summarised below.
On the asset side of the balance sheet, insurers were asked to consider t he following:
Physical risksDamage to collateral, such as real estate, investments or exposure to other realestate investments; andWrite-down of bonds and equities of companies whose property or processes are
exposed to physical effects of climate change.

Transition risks

Write-down of loans to and investments in companies with large carbon footprints
that are sensitive to an energy transition (stranded assets);
Write-down of mortgage loans and investments in non-sustainable real estate; andIncreasing risks for mortgage loans, bonds and businesses that are vulnerable toan energy transition, which means higher capital buffers are required for such
assets.

When designing climate-related scenarios for the ORSA, insurers were asked to consider
the following:

Use of country-specific scenarios (eg scenarios developed by regulators or
meteorological agencies);
Adopt the relevant principles of climate-related stress tests performed byregulators; andIntegrate indirect effects of climate-related risks that may lead to an increase inclaims into scenario and impact analyses, such as potential health risks andincreased mortality rates.

The following examples mainly relate to supervisory stress testing but may neverthelessprovide valuable examples related to defining relevant scenarios, and setting up stresstesting exercise.
FranceIn 2020, the first climate risk evaluation in the banking and insurance sector was carriedout by the ACPR. The exercise aimed to take stock of the availability of data and thesuitability of current modelling approaches, and more broadly to improve understanding of
the interactions between climate change and the macro-financial realm.
To link climate and policy shocks with their financial impacts, the Banque de France has
adapted the National Institute Global Econometric Model to yield macroeconomic shocks
at the country level following an increase in carbon prices. The baseline scenario for the
exercise assumes that the emissions goals of the Paris Climate Agreement will beachieved, with three variants:

A disorderly transition without favourable technological developments;
A EUR 200 per ton carbon tax implemented in 2025; and20

See
https://www.dnb.nl/en/sector-information/supervision-sectors/insurers/prudentialsupervision/riskmanagement/q-a-climate-related-risks-and-insurers
and
https://www.dnb.nl/media/43ufhxoj/good-practice-integrating-climate-related-risks-in-the-orsa.pdf
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A EUR 300 per ton carbon tax implemented in 2030 with accompanying shocks to
productivity levels.

Insurers will carry out projections for 2025 using a static balance sheet from 2020, whilefurther horizons (2030 and 2040) can integrate management decisions intended to mitigate
financial risks, in line with the insurer’s previous communication. The results of the exercise
were published in April 2021. 21
Japan
In its annual strategy from 2020-2021, the JFSA prioritises dialogue on climate-related risk
with financial institutions. JFSA continues to have close dialogue with major insurers to
explore the possible approaches for climate-related scenario analysis.
Singapore
The Monetary Authority of Singapore (MAS) regularly conducts Industry-Wide Stress Tests(IWST) for selected direct insurers representing at least 80% of the market.
MAS included a climate variability scenario in the 2018 IWST, to raise the insurance
industry’s awareness of the financial impact of climate change on the insurers’ capital
positions, so as to enable insurers to consider the relevant climate -related risks as part oftheir ERM framework.
The climate variability scenario required direct general insurers to estimate the impact ofsevere flooding in Singapore (at an average depth of 600 millimetres) by assessing theimpact on their exposures through insured properties (by consider ing a list of flood-prone
areas in Singapore). Insurers were also required to provide qualitative assessments on thepossible implications on their business lines such as motor and public liability insurance.
The introduction of climate variability scenario helped to raise the industry’s awareness on
the impact of climate-related risks to their business portfolio, and provided MAS with adeeper understanding of the industry’s flood-risk exposure.
MAS is working on refining future stress test scenarios related to climate risks such aslengthening the stress test time horizon and broaden ing the scenarios to include
assessment of transition risks. Through the introduction of climate-related stress scenariosin the IWSTs, MAS aims to raise industry awareness about climate-related risks relevantto the Singapore insurance industry and encourage insurers to adopt relevant stressscenarios (where applicable) in their ORSAs.
United Kingdom
The Bank of England (“the Bank”) conducts biennial industry-wide insurance stress tests(IST) for the UK’s largest regulated life and general insurers representing more than 70%of the market. In 2019 the IST included an exploratory climate scenario assessing theimpacts to assets and liabilities arising from physical and transitio n risks. The exercise
included three scenarios that explored a range of potential greenhouse gas transitions
including the Paris Agreement, a disorderly transition and a high physical risk scenario.
Despite being voluntary, all firms completed the exercise, enabling the Bank to (i) raise theclimate agenda at Board level; and (ii) identify and understand weaknesses in the current
capabilities, tools and data available in assessing the potential impacts from climatechange.

21Seehttps://acpr.banquefrance.fr/sites/default/files/medias/documents/20210504_as_pilot_exercise_climat_change.pdf
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In June 2021, informed by the findings from IST 2019, the Bank will test the resilience of
the UK financial system to the physical and transition risks associated with different climate
pathways over a number of decades. The desired outcomes are to (i) size the financial
exposures of participating firms and the financial system more broadly to climate -relatedrisks; (ii) understand the challenges to participants’ business models, and investigatinginterdependency between insurers and banks; and (iii) assist participants in enhancing
their management of climate-related financial risks, including encouraging firms to take astrategic, long-term view to addressing climate risks and highlighting data gaps that need
to be filled for effective disclosure.
United States
US ORSA requirements as described in the NAIC ORSA Guidance Manual, 22 require
insurers to explain how they identify, assess, monitor, prioritise and report all material andrelevant risks. To the extent that an insurer deems climate-related risks material to its
business strategy and operations, these risks should be disclosed in the annual ORSA
Summary Report filing with the regulator. The determination as to whether climate-relatedrisks are material is made in the first instance by the insurer and later reviewed by thesupervisor. The supervisor has the authority to require the insurer to incorporate climaterelated risks into its ORSA and/or require changes in assumptions and scenarios utilisedby the insurer in this area.
The California Department of Insurance has initiated multiple efforts and partnerships since2015, developing new strategies to test insurer exposures to fossil fuel investments andclimate-related transition risks. For example, the Department partnered with 2 Degrees
Investing Initiative, which conducted a comprehensive financial stress test analysis for the
insurance sector. 23 In addition to this scenario analysis stress test, the Department also
developed a database for insurer investment information related to fossil fuels. 24 Both thescenario analysis stress test and the database provide a foundation for future policy work.

6

Investments

67.
The Introductory Guidance in ICP 15 (Investments) explains how quantitative andqualitative requirements should take account of the risks that insurers face through theirinvestments, in order to ensure that assets are “sufficient to cover technical provisions andcapital requirements” (see ICP 15.1.1) Additionally, certain standards within ICP 16 require
the insurer’s ERM framework to include an explicit ALM policy and an ERM framework that
addresses risks from investments (see ICP 16.5 and 16.6).
6.1

Climate-related risks for investments

68.
Physical and, especially, transition risks can have complex and non -linear impacts on
insurers’ investments. Where material, these risks must be taken into account regardless ofwhether the insurer invests directly or through a third-party asset manager or investment
advisor. This section provides guidance related to supervisory approaches on investments.
Box 4 includes examples of relevant supervisory practice.

22

Seehttps://content.naic.org/sites/default/files/inline-files/prod_serv_fin_recievership_ORSA2014_1.pdf
23
See https://interactive.web.insurance.ca.gov/apex_extprd/f?p=250:70
24
See https://interactive.web.insurance.ca.gov/apex_extprd/f?p=250:1:0
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69.
Both transition and physical risk have the potential to affect investments via
credit/counterparty default risk (eg an increase in the probability of default or loss given
default), market risk (eg a change in the value, trend, or volatility of an asset or derivative, inparticular equity, property or spread risk) as well as liquidity risk (eg as a result of a sudden
cash outflows as a result of a natural hazard). Transition risk and physical risk can al so include
second-order effects such as indirect losses in insurers’ investments due to the devaluation offinancial counterparties that have high exposures to those climate -sensitive sectors, or the
impact of changing investor sentiments on market values.
70.
ICP 15.1.1. states that the quality and characteristics of an insurer’s asset portfolio andthe interdependence between the insurer’s assets and its liabilities are central to theassessment of an insurer’s solvency position and, therefore, are an importa nt aspect to beaddressed by the supervisor and for an insurer to manage. In assessing the risks attached tothe asset portfolio, and depending on the duration and quality of the portfolio and ALM, it may
be relevant for supervisors to enquire as to the impact of the insurer’s investment from climatechange as it has the potential to impact the risk-return characteristics of a portfolio. The longer
the duration of the asset portfolio, the more important it is for the insurer to understand therisk. At the same time, transition risks can happen at any time and in a sudden manner, andthus require insurers to review their investment strategy regularly.
6.2

Asset liability management (ALM)71.
ICP 15 requires insurers to invest in assets that are secure and available, so thatpayments to policyholders or creditors can be made as they fall due and assets are adequately
diversified. ICP 16 requires insurers to include an ALM policy within their ERM framework,
which helps insurers asses the ability to pay policyholders or creditors on a timely basis.
72.
Climate change can negatively affect the matching of assets and liabilities , primarily
through transition risk, as insurers with long duration products use longer-term bonds to matchthe liability cash flows. Due to the long-term nature of the bonds, insurers should consider the
potential that individual firms or an entire sector, could be significantly impaired over thematching period when constructing their investment portfolios. Correlation between different
asset classes would also be an important consideration. Additionally, correlation between
assets and liabilities when holding both a bond of an entity and insuring that entity for risks
related to climate change should be considered.
73.
The time horizon is an essential component as the impact of climate change on
insurers’ investment portfolios may fully materialise over an extended period and therefore
impact either the value or expected cash-flows from financial assets only in the long-term.
Transition risks, arising from political decisions, regulatory policies, changing demand orinvestor expectations, can happen at any time and suddenly, and thus require insurers to think
about their investment strategy now. Therefore, the time horizon is an essential component
for defining the investment strategy. ALM would be particularly important for long-tail businessgiven the long duration of their liabilities coupled by climate-related risks that can materialiseover an extended period.
6.3

Risk assessment of investments

74.
ICP 15 requires insurers to invest only in assets for which it can properly assess andmanage the risks (see ICP 15.4). For that reason, a forward-looking view with quantitative andqualitative data, as well as the use of scenarios, can help overcome potential limitatio ns of
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historical and market data and help insurers consider how their investments may be impacted
in different climate scenarios. 25
75.
External credit ratings can assist the insurer in determining the credit risk of aninvestment. However, insurers should have enough information to fully understand the rating
methodology. Insurers should also consider the extent to which climate risk has been factored
into the rating as well as the time horizon of the assessment.
6.4

Impact of investments on climate change

76.
Certain institutional investors, including insurers, apply engagement strategies to steer
the activities of the assets they are holding (where their shareholders’ rights allow). Suchstewardship would act to influence the strategy and business of the firms in whi ch they are
investing to progress towards sustainable economic activities, and contribute to reducing
climate-change related risks.
77.
Where possible, the exercise of a stewardship approach by the insurer, promoting risk
mitigation and adaptation to climate change, may have an impact on the risk profile of theinvestment. This may include insurers’ active engagement with investees to achievesustainable investment outcomes through voting strategies or other investment strategies
such as, for example, exclusions (negative screening), norms-based screening, integration of
ESG factors, best-in-class (positive screening), sustainability-themed investments or impact
investing.
78.
In order to be effective, an engagement strategy with the investee company may
include exercising voting rights as a shareholder, sending letters to or attending meetings withthe management of investee companies, setting up documented and time -bound engagementin actions or shareholder dialogue with specific sustainability objectives, plannin g escalation
measures in case those objectives are not achieved, including reductions of investments or
exclusion decisions. 26
Box 4: Examples of supervisory practice on Investments
Chinese Taipei
The FSC has required insurance associations to incorporate climate change issues ininvestment-related specification as a tool to encourage insurance companies to pay close
attention to climate change issues. The insurance industry should review whether thelenders are doing their best to protect the environment, conduct business with integrity andsocial responsibility, and the overall investment policy formulated by the insurance industry
should include projects for environmental protection, corporate integrity and social
responsibility.
In addition, the FSC encourages insurers to sign up the “Stewardship Principles for
Institutional Investors” to urge the financial industry to implement shareholder activism andresponsible investment, consider ESG-related risks and opportunities, incorporate ESG
issues into the investment evaluation and decision-making process, and enhance
corporate governance quality.
European Union

25
26

See NGFS (2019).
See ESMA (2020), Joint Consultation Paper on ESG disclosures.

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In the EU, the prudent person principle, which is the overarching principle under Solvency
II and requires that undertakings only invest in assets whose risks they can properly
identify, measure, monitor, manage, control and report on, could be revised. The EIOPA2019 technical advice on integrating sustainability risks and factors within Solvency IIadvises on a change of the regulation to consider mention that undertakings should
consider sustainability risks in the process of assessing the security, quality, liquidity andprofitability of the investment portfolio, as required by the “prudent person principle”. The
European Commission has published proposed legal changes based on EIOPA’s technicaladvice.27
As part of integrating sustainability risks into Solvency II, EIOPA includes the principle ofstewardship. As indicated in its Opinion on integrating sustainability risks within Solvency
II28 EIOPA deems that “the transition towards a more sustainable economy should rely on
this principle. From a prudential point of view, this can greatly contribute to the
management of sustainability risks.”

7

Public Disclosure

79.
According to ICP 20 (Public Disclosure) the supervisor requires insurers to disclose
relevant and comprehensive information on a timely basis in order to give policyholders andmarket participants a clear view of their business activities, risks, performance and financ ial
position.29 Public disclosures on emerging(ed) risks, including risks from climate change, areof primary relevance to this objective. In establishing disclosure requirements for the risks
associated with climate change, the supervisor should take into account existing relevant
requirements as well as proprietary and confidential information that could negatively influence
the competitive position of an insurer if made available to competitors.
80.
ICP 20 requires insurers to provide information on all material risks faced by thecompany and its management. If risks associated with climate change are material to theinsurer, it follows from ICP 20 that information thereon must be disclosed. The level and typeof information disclosed may depend on the line of business; for example, d isclosures on
climate-related risks to insurers’ investment portfolios are likely to be more extensive for life
insurers with long duration insurance contracts, while non-life insurers that write one-year
contracts are likely to focus relatively more on their underwriting and risk management
implications of climate change. However, this does not mean that the investments of non-life
insurers are not exposed to risks from climate change, and that these risks should be
neglected.
81.
Supervisors that are considering the introduction of mandatory disclosure
requirements on the risks from climate change may wish to consider a range of approaches,recognising the iterative nature of disclosure processes and early stages of certain aspects ofclimate risk assessment methodologies. In addition, as ICP 20 allows supervisors to meet thestandard through public general-purpose financial reports, supervisors may want to consider
allowing insurers to augment those disclosures with relevant climate-related information, if
applicable, rather than requiring duplicative disclosures for regulatory purposes.

27

See https://ec.europa.eu/transparency/documents-register/detail?ref=C(2021)2628&lang=en
See EIOPA (2019), Opinion on Sustainability within Solvency II.
29This includes existing and potential investors, lenders and other creditors.
28

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82.
Supervisors may also use the Financial Stability Board (FSB) TCFD Framework when
designing best practises or as input for setting their own supervisory objectives. Going forward,
supervisors may seek to adopt, or make reference to, various aspects of the TCFD frameworkin their interpretation of the various ICPs discussed in this Paper, in part icular ICP 20.
83.
The remainder of this section discusses those Standards of ICP 20 that are deemedmost relevant in determining how comprehensively insurers have publicly disclosed theinterplay between climate change and their business. Box 5, provides several examples ofsupervisory practice around climate-related disclosure requirements.
7.1

General disclosure requirements

84.
Enhancing the availability and quality of climate-related information is now widely
understood to be a foundational component of market and policy action to address risks fromclimate change. Insurers should incorporate in their disclosure the extent to which their risk
profile exposes them to the impacts of climate-related risks. Insurers that have developed
metrics, should disclose the metrics used to assess risks and opportunities arising fromclimate change in line with their strategy and risk management process and how the metrics
are set, tracked and rewarded across the organisation. The metrics should also indicate theuncertainty in the measurement so users can understand the quality of the information. They
should also describe the targets used by the organisation to manage risks of climate change
and performance against targets. The information on metrics and targets does not necessarilyneed to be quantitative, but should cover material risks. It is also expected that as themeasurement of the risks improve over time, the uncertainty within the measurements will
decline.
85.
Insurers that perform climate-related scenario analysis on their underwriting activities
are encouraged to disclose a description of the climate-related scenarios used, including thecritical input parameters, assumptions and considerations, and analytical choices. Indicationsof the quality of the scenario analysis should also be provided. Insurers should also indicate
how the assumptions and parameters align with their risk appetite and strategic businessdirection.
7.2

Company profile

86.
Insurers should describe the climate-related risks and opportunities the insurer has
identified over the short-, medium- and long-term, the impact of climate-related risks andopportunities on the organisation’s businesses, strategy, and financial planning.
87.
The information should include supporting quantitative information, where available
and relevant, on their core businesses, products, and services, including information at thebusiness division, sector, or geography levels. Insurers should also disclose how the potential
impacts of climate-related risk influence policyholder, cedent, or broker selection, and whether
specific climate-related products or competencies are under development, such as insuranceof green infrastructure, specialty climate-related risk advisory services, and climate-related
policyholder engagement.
88.
Insurers should provide information on the impact of climate change on their businessand may be encouraged to provide information on how their business impacts the climate.
This should enable users to both understand the impact of climate -related risks on the insurer
and vice versa.
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7.3

Corporate governance framework

89.
Disclosures should describe the Board’s oversight and Senior Management’s role inassessing and managing climate-related risks and opportunities. Insurers should also
describe the organisation’s processes for identifying and assessing climate -related risks, anddescribe how processes for identifying, assessing, and managing climate -related risks areintegrated into the organisation’s overall risk management. They may also describe how risk
and opportunities are communicated internally (eg management reports) across the company
and where they are communicated externally (regulatory filings, company r eports, TCFD,etc.).
7.4

Insurance risk exposures

90.
Insurers should disclose the process by which they have identified, assessed andmanaged climate-related risks and opportunities. Insurers should disclose the process forundertaking scenario analysis, taking into consideration different climate-related scenarios,
including physical, transition and liability risk scenarios, and the rationale and limitations of thechosen approach. Insurers should disclose the process for integrating climate -related risks
and opportunities into underwriting processes across the business (considering relevance tothe nature of the business) over the short, medium and long-term. They may also describe theactions taken in response to risks from climate change, which could include, for example, new
exclusion policies, an updated risk appetite statement, new underwriting targets andpolicyholder engagement efforts. Where third party models have been used, the insurer should
provide a description of how they have vetted the model.
7.5

Financial investments and other investments

91.
Insurers should disclose how climate-related risks and opportunities are factored into
relevant investment policies. This could be described from the perspective of the overall
investment policy or individual investment policies for various asset classes.
92.
Insurers should disclose how investment portfolio decisions assess and address asset
classes, such as real estate and mortgage-backed investments, which are more vulnerable torising ocean levels, coastal flooding and storms, drought, wildfire and other natural disasters.
They should describe how climate-related risks are factored into investment portfolio decisions
and processes, and the potential impact of the portion of the portfolio composed of high -carbon
assets on capital adequacy. They should also disclose any considerations for investing infunds focused on innovation, clean technologies and biofuels or in companies committed toclimate resilience, how the current investment diversification and geographical ass et allocation
addresses climate risk, and the efforts to diversify or divest against climate risk and any
resulting financial impact.
Box 5: Examples of supervisory practice on disclosure requirements
See also the IAIS/SIF 2020 Issues Paper for further case studies from various SIF/IAIS
members taking a range of actions to strengthen climate risk disclosures.
Chinese Taipei
The FSC launched the Green Finance Action Plan 2.0 in August, 2020. In terms of
information disclosure, the measures in the Action Plan 2.0 require companies to disclose
ESG information (including GHG emission related information) that is financially material
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and useful for decision-making; and study the implementation of disclosure of climaterelated information in accordance with TCFD recommendations.
In order to enhance the quality of ESG disclosure, the Action Plan 2.0 further expands thescope of listed companies whose ESG reports are subject to third -party verification.
Furthermore, the Action Plan 2.0 lays out plans to construct and strengthen the ESG data
integration platforms, which include establishing Taiwan Sustainable Finance Taxonomy
and databases integrating climate change and environment-related information for use bybusinesses and financial institutions in the assessment of potential risks and scenario
analysis.
The FSC has required that CSR Reports of 2021 should be prepared and filed by lis ted lifeand non-life insurers. For life insurers, the requirement is applicable to those with total
assets above a certain level. For non-life insurers, the top five non-life insurers complying
with rules shall be subject to third party verification, to disclose the implementation
outcomes and in response to climate change.
European Union
In December 2019, Regulation (EU) 2019/2088 on sustainability-related disclosures in thefinancial services sector, was published and is directly applicable in all EU Member Statessince 10 March 2021. It applies to financial market participants and financial advisers,
including insurers. It lays down harmonised rules on transparency with regard to theintegration of sustainability risks, the adverse impact on the investment portfolio and thetransparency on ESG characteristics of products marketed as “green” or “social” products.
With this regulation, sustainability-related disclosure within the EU should improveconsiderably.
FranceAccording to article 173 of the French law on ecological transition and green growth,passed in August 2015, French insurers are required to disclose how they take into account
ESG criteria in their investment decisions.
ACPR published in April 2019 the main findings of the review of these reports, with theview to call upon insurers to better take into account and manage ESG risks, primarily bydeveloping a prospective approach and making use of appropriate scenarios:






76% of the sample issued a dedicated report and 24% included this information ina pre-existing report, such as the annual report;
All insurance groups described their consideration of ESG criteria and labels used.
Almost all insurers implemented an exclusion or divestment policy, mostly on thebasis of environmental criteria (for instance, divestment from coal mining) and havean investment policy in green bonds;
The measure of carbon intensity of assets is the most widespread metric for theseinvestment decisions. Other metrics used come from credit rating agencies or
public institutions; andOnly half of the sample specifies whether the climate-related risks to their businessare physical or transition risks, whereas article 173 requires financial institutions toreport on their exposure to climate risks, especially the GHG emissions of theassets they own (transition risk). Little information is published on how ESG risks
are managed. Some groups indicate they use stewardship to influence ecologicaltransition of firms they invest in. Some groups also set up a team dedicated to social
responsible investment.

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JapanAccording to the Act on Promotion of Global Warming Countermeasures and the Act on
Rationalizing Energy Use, it is mandated for companies emitting GHGs above certain
thresholds to report to the government, which collects and discloses the information.
Additionally the Corporate Governance Code, which was adopted by listed companies on
a comply-or-explain basis, calls for broader stakeholder engagement highlighting theimportance of ESG.
Furthermore, Japan has the highest number of TCFD supporters in the world , amounting
to 358 institutions (as of March 2021). This includes 13 insurers, which covers more than
70% of the total assets of the sector. The TCFD Guidance, which was revised by the TCFD
Consortium in July 2020, includes specific guidance for life and non -life insurers to further
enhance their climate-related disclosure. In April 2021, JFSA and the Tokyo Stock
Exchange published a draft revision of the Corporate Governance Code that requires
companies listed in the “prime market” to disclose information based on TCFD
recommendations based on a “comply or explain” basis. The revision will be finalised inJune 2021 after public consultation.
Switzerland
Financial institutions have until now displayed varying levels of transparency with regard
to disclosure of climate-related financial risks. In order to create more transparency, FINMA
is therefore specifying the disclosure requirements pertaining to these risks for large
financial market players. For this purpose, FINMA conducted a public consultation 30 until
January 2021 on the planned amendments in its Public Disclosure Circulars for Banks andInsurers.
For the insurance sector, it is proposed that large insurance companies and insurancegroups are required to make their climate-related financial risks transparent from 2022
onwards. The approach is based on the recommendations of the TCFD.
In terms of content, the following principle-based elements should be covered anddisclosed:Governance: description of how the Board of Directors fulfils its oversight
responsibilities in respect of climate-related financial risks;
Strategy: description of the key climate-related financial risks identified - short-term,
medium-term, and long-term risks, as well as their impact on business strategy,
business model, and financial planning;
Risk management: description of the risk management process for theidentification, evaluation, and addressing of climate-related financial risks; andQuantitative information on climate-related financial risks and the methodologies
underpinning such information.

Transparency with regard to climate-related financial risks at supervised entities is an
important first step towards the expedient identification, measurement, and managementof such risks. More comprehensive and uniform disclosure of climate-related financial risks
by major financial market protagonists will improve transparency and lead to greater
market discipline.
United Kingdom

30

See Transparency obligations for climate risks - FINMA opens consultation (10.11.2020)

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In 2015, Mark Carney, in his capacity as chair of the FSB, established the TCFD. The Bankand Mark Carney, in his capacity as its Governor, have promoted the importance of clear
and reliable climate disclosures to regulated firms, including insurers.
In 2019, the Bank strengthened its support for climate-related financial disclosures by
setting out expectations in a supervisory statement31 that PRA-regulated firms “develop an
approach to disclosure on the financial risks from climate change”. This asked firms to:Consider whether further disclosures (beyond existing requirements) arenecessary to enhance transparency on their approach to managing the financial
risks from climate change;
Develop and maintain an appropriate approach to disclosure of financial risks fromclimate change; andEngage with wider initiatives on climate-related financial disclosures, such as
TCFD, and to take into account the benefits of disclosures that are comparable
across firms.

To help inform the Bank's view of best practice, beyond what it has stated in the 2019supervisory statement, the PRA convened the Climate Financial Risk Forum jointly wi th
the Financial Conduct Authority. The objective of this industry forum is to build capacity
and share best practices to advance financial sector responses to the financial risks fromclimate change. The forum has set up four technical working groups to p roduce practical
tools and guidance; one of the four working groups is focused on disclosure. The outputs
from the Forum were published at the end of June 2020. 32 Also in June 2020 the BoE
published its first TCFD-aligned climate report, setting out its approach to managing therisks from climate change across its entire operations and what it is doing to improve its
understanding of these risks. The PRA’s supervisory focus for 2021 will be on assessing
the extent to which firms have fully-embedded the supervisory expectations in SS3/19 by
the end of 2021.
Finally, the UK Government’s Green Finance Strategy sets an expectation for publicly
listed and large asset owners to disclose in line with the TCFD Recommendations by 2022.
To help operationalise this expectation, the Bank is a member of a joint taskforce of UK
regulators, chaired by the Government, that developed and published a Roadmap chartinga path to mandatory TCFD-aligned disclosures across the UK economy by 2025, with the
majority of measures introduced by 2023.
United States:
In the US, the Climate Risk Disclosure Survey was adopted by the NAIC in 2010. Currently,
the survey is being administered in a multi-state initiative that includes California,
Connecticut, Minnesota, New Mexico, New York and Washington. The survey’s eightquestions ask insurers to provide a description of how they incorporate climate risks into
their mitigation, risk-management, investment and business plans and identify steps taken
to engage key constituencies and policyholders on the topic of climate change.
Responses are collected annually from insurance companies with direct written premiums
over USD 100 million (about 1,200 individual insurers representing over 70% of US direct
written premium) and annual responses are organised into a publicly accessible database,located on the California Department of Insurance website.

31

See
https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisorystatement/2019/ss319.pdf?la=en&hash=7BA9824BAC5FB313F42C00889D4E3A6104881C44
32
See https://www.bankofengland.co.uk/climate-change/climate-financial-risk-forum
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Insurers were encouraged to incorporate FSB TCFD guidelines when answering theReporting Year 2018 NAIC Climate Risk Disclosure Survey, which could effectively alignthe survey with the TCFD guidelines. For the Reporting Year 2019 NAIC Climate Risk
Disclosure Survey, which was due from insurers in 2020, participating insurers wereallowed to submit a TCFD report in lieu of the NAIC Climate Disclosure Survey; as a result,85 individual companies and eight groups submitted TCFD reports.33

33

More about the survey, including all survey responses over the past ten years, can be found at thefollowing link: http://www.insurance.ca.gov/01-consumers/180-climate-change/ClmtRskDsclsrSrvy.cfm
PublicApplication Paper on the Supervision of Climate-related Risks in the Insurance Sector
Adopted by the IAIS Executive Committee – May 2021

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