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Re/insurers facing triple challenge of climate change: IAIS

6th February 2017 - Author: Staff Writer

The International Association of Insurance Supervisors (IAIS) outlined a three-pronged set of climate-change related risks facing insurers and reinsurers, in a report released yesterday.

The report demonstrates re/insurers’ uniquely vulnerable position; the resources used for underwriting risks may be simultaneously invested in assets that are vulnerable to these risks and come under threat from other climate-related interruptions to business.

The IAIS has broken down the potential challenges facing the industry into three major risk categories of re/insurers as investors, corporations, and underwriters.

The association said; “While insurers’ responses to climate change may have the potential to contribute to addressing challenges that climate change poses, they also generate risks,” emphasising how the effects of climate change can form an interconnected, vicious cycle of risk that could elude the very industries seeking to mitigate against its impact.

Re/insurers face risks in their capacity as underwriters of insurance risks where they hold a liability for compensating policyholders that have suffered climate-change related damages.

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As underwriters of property risks, insurers are affected both directly and indirectly; properties could be damaged by weather events – but a wide chain of indirect risks could come from weather-related business interruption events such as disruptors to the supply chain.

And IAIS has warned that a study by the UK’s Prudential Regulation Authority, shows “indirect physical risks are less likely to have been fully incorporated into insurers’ models and other risk management tools than direct physical risks.”

Climate change also poses complex layers of risks to re/insurers that underwrite casualty business: an insured’s failure to mitigate risks which could cause loss to a third-party; such as failure to reduce carbon emissions in line with regulations, insured’s failure to adapt to climate change related risks; lack of foresight and preparation by company CEOs, and cases of failure to disclose climate related risk where regulations require disclosure.

As underwriters of life and health risks, re/insurers will be increasingly affected by climate change related risks such as increased morbidity and mortality where events like peak -and/or protracted- heat waves negatively impact population health and spread disease, says the report.

The second major category of climate change related threat, reported by IAIS, comes to re/insurers as institutional investors: the danger lies in re/insurers investing their capital in assets such as real estate that could lose value from climate change-related damages.

Loss of value could be hard for insurers and reinsurers to accurately assess in cases where it’s indirect, for instance, if located in an area that could be susceptible to gradual climate change losses, such as coastal areas affected by rising sea levels.

An additional asset-loss risk is to re/insurers as; “holders of shares or debts of firms or countries contributing to, or exposed to the effects of, climate change, like fossil fuel producers or consumers (eg electricity companies or oil-producing countries).

“Assets of these firms may be subject to transition risks and undergo sudden and or sharp loss in value as a result of the adjustment process towards a lower-carbon economy. This would affect investment portfolios of insurers,” says the report.

According to the IAIS report, the final major set of risks comes to insurance and reinsurance companies as corporations – they may fail to disclose climate change related risks where they have a duty to reveal these risks to stakeholders; “failure to disclose relates not only to public authority requirements but also to a corporation’s fiduciary duty to report any risks materially affecting it, including climate change related risks.

“Insurers, like other corporations, face the risk of not appropriately handling climate change related matters, from risk identification and understanding to risk assessment and management. This includes setting appropriate management and governance arrangements to enable insurers to adequately equip themselves to address climate change,” says the report.

This triple challenge of climate change paints, above all, a rapidly changing landscape, where new risks, regulations, and policies must be assessed and adopted to protect balance sheets and combat the many different levels of uncertain, climate change risk.

Adopting a proactive approach, according to IAIS, could include “the development of new products and services, the transition of the corporation into a ‘greener’ corporations one, or the engagement with policyholders and governments in the pursuit of collective approaches to addressing climate change.”

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