Central Bank launches consultation on climate change risk guidance for the insurance sector

• Climate change is no longer an “emerging risk” – the time for action is now.
• Strengthen the resilience of the financial system to climate-related risks a key priority for the Central Bank.
• The Central Bank expects all insurers to monitor their exposure to climate change risk.

The Central Bank of Ireland has today (3 August 2022) commenced a public consultation on proposals to introduce guidance on climate change risks for the insurance sector.

The increased frequency and severity of weather related events linked to climate change is already having an impact on the insurance sector globally. The increase in insured claims arising from physical events alongside the impact of the necessary actions to transition away from greenhouse gas intensive activities, mean that (re)insurers need to take action now to assess and appropriately manage climate change risk.

In discussions with stakeholders on climate change risk it was noted that, while there is consensus that action is required, there is uncertainty on what to do and where to begin. A survey published by the Central Bank in May 2021 found that only 20% of (re)insurers fully integrate climate-change risk in their risk management framework, with less than half conducting some form of scenario analysis of stress testing.

Governor of the Central Bank of Ireland Gabriel Makhlouf said: “We have identified the need to strengthen the resilience of the financial system to climate-related risks and supporting the transition to a carbon-neutral economy as an integral theme of our strategy. Climate change is no longer an emerging risk – the stakes are high, not just for the future viability of the insurance sector, but also for society as a whole. The Central Bank expects to see a step change in the way that (re)insurers are responding to climate change risks, and we look forward to further and continued engagement with stakeholders on this important topic.”

The proposed Guidance aims to clarify the Central Bank’s expectations on how (re)insurers address climate change risks in their business and to assist them in developing their governance and risk management frameworks to do this.

The Central Bank has initially developed guidance for the (re)insurance sector, given the key role insurance plays in assessing and managing climate change risk as part of its core business activities. The Central Bank will consider adapting the guidance for other sectors in due course.

Recognising that individual (re)insurers may be at different stages of maturity in their approach to managing climate change risk; the proposed guidance is based on a set of overarching principles and sets proportionate expectations dependent on the nature, scale and complexity of the (re)insurer. The overarching principles include:

• Iterative approach – insurers need to build capacity and experience in this area. Sophistication of methodologies are expected to improve over time;
• Climate change risk is a key risk – should no longer be managed as an emerging risk but as a key risk;
• Double materiality – insurers should consider the impact of “double materiality” on their activities;
• Own Risks and Solvency Assessment (ORSA) –  The ORSA is central to adopting an integrated approach to managing climate change risk;
• Time horizons – In their assessment of their exposure to climate change risk, insurers should consider the impact of climate change over the short, medium and long term.
• Group engagement – Where insurers leverage group policies and activities, they should ensure that these are appropriately adapted for the local entity.

The Central Bank has also created an infographic to provide a visual overview of the approach to the assessment and ongoing management of a (re)insurer’s exposure to climate change risk set out in the Guidance.

Source: CBI Ireland