The Central Bank of Ireland has commenced a public consultation on proposals to introduce guidance on climate change risks for the insurance sector.
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 said that the increased frequency and severity of weather-related events linked to climate change are already having an impact on the insurance sector globally, noting that 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 act now to assess and appropriately manage climate change risk.
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.
Gabriel Makhlouf, Governor of the Central Bank of Ireland, stated, “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.”
Acknowledging that individual (re)insurers may be at different stages of maturity in their approach to managing climate change risk; the Central Bank’s 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 Central Bank has expressed that an iterative approach must be in place, affirming that insurers need to build capacity and experience in this area, and are expecting improvements in the sophistication of methodologies over time.
The guidance suggests that climate change should no longer be managed as an emerging risk but as a key risk. Insurers should also consider the impact of materiality on their activities.
Own Risks and Solvency Assessment (ORSA) is declared central in adopting an integrated approach to managing climate change risk, in addition to time horizons and group engagement.
