Insurance regulators encouraged to manage climate change risk

Insurance regulators need to assess climate change risks and integrate them into their supervisory practice, the International Association of Insurance Supervisors (IAIS) said in an application paper of changes to its core principles.

The expanded guidance does not include new requirements for supervisors but instead builds on an older paper on climate-related risks by providing further details, advice and examples after multiple consultations with stakeholders.

Specifically it offers advice for supervisors on how to assess insurance climate-related risks, how to integrate those risks into supervisory frameworks, and the impact on valuation and investment practices.

More of the insurance core principles (ICPs) were expanded to include climate risk, with 11 ICPs now covering climate compared to six previously. It includes recommendations for supervisors to review the impacts of climate risk on insurers’ investments. It also mentions assessing impacts through scenario analysis and stress testing, and points to transition plans as a possible way to reduce protection gaps long-term.

The paper also encourages insurers to adopt a more integrated approach to risk modelling, including forward-looking assessments to complement historical data.

The guidelines from the association, which represents insurance regulators and supervisors from over 200 jurisdictions, are not legally binding but inform many of the policies for national and local insurance supervisors.

Paul Fox, senior researcher at advocacy group Finance Watch, said the report was in line with what was expected and covers more in scope than in the previous paper.

“It’s really giving detailed requirements with explicit mentions of climate-related risk throughout more of the ICPs,” he said.

The changes are not dramatic but are more about specific wording with much more detail, he added. There are clearer references to climate-related risk with less conditional wording.

“Before you would have climate-related risk which might, perhaps, possibly impact this requirement here or there … Now you’ve got much more concrete wording explaining that it is going to be a potential financially material risk, getting into more core parts of the framework”.

The paper also mentions transition plans as a potential way for regulators to get data, which is “positive” and “a good source of information that insurers should be using when available”, Fox said.