On 3 August 2022, the Central Bank of Ireland (Central Bank) launched a public consultation paper (Paper) on the proposed introduction of guidance on climate change risks for the (re)insurance sector: ‘CP151- Guidance for (Re)insurance Undertakings on Climate Change Risk ‘(Guidance).
What is the purpose of the Paper?
The purpose of the Paper is to gather stakeholders’ opinion on the proposed Guidance. The Central Bank considers the proposed Guidance and the related required action from (re)insurers necessary due to:
- the increasing severity and incidences of weather-related events connected to climate change and the global impact this is having on the (re)insurance industry;
- the rise in insurance claims linked to physical weather events; and
- a requirement for (re)insurers to transition away from greenhouse gas activities.
In May 2021, the Central Bank published the results of a survey, ‘Understanding the Future of Insurance: Climate and Emerging Risk Survey’ (Survey). The results of the Survey found that while there was an awareness of the risks presented by climate change:
- only 20% of (re)insurers surveyed fully integrated climate-change risk into their risk management framework;
- most (re)insurers were not conducting stress testing/ scenario analysis; and
- more than half of the (re)insurers surveyed did not have a climate plan, policy or strategy in place.
Who does the proposed Guidance apply to?
The Central Bank recognises the key role (re)insurers play in managing and evaluating climate risk. The proposed Guidance will be applicable to all (re)insurance undertakings authorised by the Central Bank, including captives and branches of third country insurance undertakings authorised by the Central Bank. The Central Bank will also consider adapting the proposed Guidance for other sectors at a later stage.
What is in the proposed Guidance?
Prior to publication, the Central Bank conducted preliminary discussions with stakeholders on climate change risk and the discussions revealed that although it is known that action is required, there is uncertainty as to what that required action is.
The Guidance does not introduce new requirements, instead it outlines a baseline standard of action that (re)insurers can take to combat the climate change risks. It is intended to guide on how best to approach and manage climate change risks, providing clarification on the Central Bank’s expectations of (re)insurers on this and in terms of compliance with Solvency II requirements.
Risk Management Frameworks
The Central Bank expects that climate change risk will be managed as a key risk itself within (re)insurers’ risk management framework and it expects (re)insurers to have in place appropriate governance frameworks capable of managing the risks effectively. The Guidance provides (re)insurers with assistance in developing their risk management and governance frameworks.
The Central Bank expects all (re)insurers to carry out a materiality assessment and requests that (re)insurers individually consider the impact that they are having on the climate, both in terms of their business investments and through the business that the (re)insurer writes.
Own Risk & Solvency Assessment (‘ORSA’)
The Central Bank considers that the ORSA carried out by each individual (re)insurer will be key in developing an integrated approach to climate change (but (re)insurers may use alternative processes if they achieve the same outcome). The Central Bank also recommends that (re)insurers’ documented risk appetite statement reflect the climate change risks to which each individual (re)insurer is exposed.
The Central Bank has highlighted that it is aware that (re)insurers may all be at different stages in their approach to addressing and managing climate change risk. As a result, the proposed Guidance centres on a set of principles setting out expectations proportionate to the size, complexity and nature of each individual (re)insurer. The Central Bank has also stated that in addition to taking a proportionate approach, it will also take an iterative approach. This means that, over time, (re)insurers will need to improve and build on their ability and experience to deal with and integrate climate change risk into their risk management and governance framework.
The Central Bank has provided a visual infographic to provide a user-friendly overview as to how (re)insurers can approach managing their exposure to climate change risk (Infographic).
Next steps for (re)insurers
- Identify and document the climate change risks that they are exposed to and delegate roles with responsibilities for managing the risks identified. The Board and senior management have a key role to play.
- Put in place effective risk management and governance frameworks to manage the risks that they are exposed to.
- Consider anticipating how their exposure to climate change risk may evolve in the future and prepare for this. The impact of climate change should be considered over the short, medium and long term.
If you have any queries on the issues discussed in this article, please contact the Insurance team or your usual William Fry contact.
Contributed by India Delaney