The Bermuda Monetary Authority (BMA) has issued a new guidance note on the management of climate risk for commercial insurers.
The guidance note outlines the BMA’s expectations for commercial insurers and insurance groups regarding their management and reporting of climate change risks.
Focussing on corporate governance and risk management practices for climate risk in the context of Environmental, Social and Governance (ESG) risks of insurance business conducted by such insurers.
With an anticipated implementation phase of up to three years, the BMA expects insurers to show continuous progress, documented in the annual Own Risk and Solvency Assessment, and monitored by the BMA through off-site data analysis and on-site visits.
Climate-related risks can impact not only insurers’ underwriting activities, but also their operations and investments, which can have a direct impact on the ability to satisfy policyholder obligations.
Insurers will be monitored by the BMA to ascertain whether they have assessed credit risk as well as counterparty risk exposures in relation to climate risks, including both affiliated and unaffiliated relationships and the impact on their statutory capital and surplus.
Therefore, insurers are expected to begin monitoring the largest counterparty exposures and work alongside such parties to ensure that exposures are fully mitigated. This should include a review of the existing investment portfolio and reinsurance programme, suggests the note.
The quality of the major reinsurers should also be assessed. An evaluation of risk mitigation techniques for climate risk exposures should be explored and may include additional reinsurance coverage, advanced analytics, alternative risk transfer concerning reinsurance and investments applying limits or reducing exposure to certain entities.
In some instances, insurers may consider engaging, via their investment manager, with certain entities to assess plans and track record in preparing to adapt to climate change or transition.
Policies and procedures should be adopted to monitor counterparty risks and to manage the impact on the insurance business. The BMA expects that enhanced due diligence for higher risks should also be implemented, such as the use of external ratings, counterparty reporting etc.
The BMA expect insurers to ensure their governance structure and governance processes embed a forward-looking, prudent, and responsible approach to handling all aspects of climate risks.
Additionally, the BMA acknowledges that risks resulting from climate change are still evolving, therefore, requests for insurers to continuously evaluate their operations considering the risks and the control mechanisms implemented to assess them, to affirm that they continue to be relevant and operate effectively.
