2022 is the year that saw unprecedented progress in climate reporting regulation around the world. The significant developments in the last year mean that climate reporting will soon become mandatory in many jurisdictions.
In the European Union, the requirements will take the shape of the European Sustainability Reporting Standards (ESRS). In the US, the Securities and Exchange Commission’s (SEC) proposed Climate Change Disclosures will form the requirements. In the UK, the first wave of companies has started to report under the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which will also eventually become mandatory in other jurisdictions.
Beyond reporting compliance, insurers have begun to understand the impact climate could have on risk management, strategy, and their overall business. Many have already been working on developing, implementing, and improving their climate and ESG-related data, models, systems, and processes.
Moody’s Analytics recently conducted interviews and a survey of 30 insurers from Europe and North America, and some responses from Asia and Australia. The aim of the survey was to determine the current level of climate integration into their risk management and reporting processes while learning about insurers’ plans in this area. The respondents ranged in insurance businesses including Life, Health, P&C, Reinsurance, and other related financial institutions. The report complements the findings from Moody’s survey published in September 2022 ‘Life Insurers: Climate Risk Modelling and Risk Assessment Process.’
The survey has shown that 52% of respondents think that significant changes are expected to current tools and models to incorporate climate risk impacts, or to make them ‘climate risk aware’. In addition, 34% expect that climate change will result in acquiring or building new models.
This was a common belief among Reinsurers. Only 14% of the companies plan to handle climate risk by using their existing risk management capabilities. The extent to which current capabilities will have to be modified is likely to have led to the fact that 62% of the companies would like to have a single system, able to support both quantitative and qualitative disclosures
Barbara Zonneveld, the Director-Product Management said, “Insurers around the world cannot ignore the impact of climate change on their business, reporting, and strategy. We have observed in our interviews that some insurers in jurisdictions such as the USA are more inclined to wait for the requirements to be finalised. They also seem to opt to follow the minimum compliance path. However, with the speed of recent global regulations and increasing investor pressure, they may soon find themselves in the scope of mandatory frameworks, such as from the ISSB, who are working on creating a global reporting baseline.”
Lack of adequate climate disclosures can also make their business look riskier to international investors. Climate change has quickly become one of the more important risks faced by insurers. Its appropriate internal measurement and management will be vital to ensure long-term business strategy resilience.
A lot of insurers choose to act as ‘front runners’ in the market, they understand that early adoption of voluntary frameworks gives them a few extra years to prepare and test their systems and processes before what may inevitably turn into mandatory reporting. As more data becomes available and models continue to get more sophisticated, climate risks and opportunities become better understood, and can be more integrated into insurers’ strategic decisions giving them a competitive advantage.
Rapid integration of climate into all aspects of an insurer’s business, with climate scenarios being at the forefront, will give insurers an operational advantage and better insights into the management of increasing physical and transition climate risks. It will also meet the increasing demands of investors around the world, looking for disclosures on approaches to climate risk and strategic actions taken to adapt or mitigate them, in the transition to a low-carbon economy.
