IAIS launches public consultation on climate risk supervisory guidance – market conduct and scenario analysis

Today, the IAIS launched its second consultation in a series that aims to promote a globally consistent supervisory approach to climate-related risks. Climate change is a key strategic theme for the IAIS as it is a source of financial risk, which impacts the resilience of individual insurers and could lead to financial stability risk. An adequate response from supervisors to risks posed by climate change supports the objectives of insurance supervision, namely protecting policyholders, contributing to financial stability and promoting the maintenance of a fair, safe and stable insurance market.

This consultation covers issues related to market conduct supervision and climate scenario analysis. In particular, the IAIS is inviting feedback on two draft application papers:

• Draft Application Paper on climate risk market conduct issues in the insurance sector aims to support supervisors in their efforts to identify instances of potential unfair treatment of consumers that can emerge in relation to natural catastrophe (NatCat) protection products or sustainability-focused products, for example through “greenwashing” or misleading information on the sustainability of an insurer’s operations. The paper will assist supervisors in considering the climate-related aspects of ICP 19 (Conduct of Business) and ICP 21 (Countering Fraud in Insurance).

• Draft Application Paper on climate risk scenario analysis in the insurance sector focuses on the use of climate-related scenario analysis as a tool used by both supervisors and insurers to understand the risks to which the insurance sector is exposed at a micro- and macroprudential level. The paper considers why and how climate-related scenario analysis exercises should be used and the extent to which they can overcome some of the shortcomings of existing methods for assessing risks. In particular, the paper focuses on how climate-related scenario analysis should be considered in light of the standards set out in ICP 16 (Enterprise Risk Management for Solvency Purposes) and ICP 24 (Macroprudential Supervision).

Comments on the papers are invited by 23 February 2024 24.00 CET. Interested stakeholders are also invited to join a webinar on 12 December 13:00 to 14:30 CET, where the IAIS will present the papers and answer questions. Click here for details and registration.

About IAIS work on climate risk supervisory guidance

The IAIS conducted the first public consultation on climate risk in March 2023. The responses generally supported the proposed changes to refer to climate-related risk within the ICP Introduction. Responses were also in favour of making changes to the existing supporting material related to governance, risk management and internal controls. Furthermore, the responses were supportive of including considerations related to transition planning by insurers within the overall climate-related work programme of the IAIS. The IAIS is considering the comments received in its ongoing work as follows:

• The draft revisions to the ICP Introduction will be further updated for adoption by end-2024.
• Updates to the existing supporting material related to governance, risk management and internal controls will be included in the public consultation that is expected to launch in March 2024.
• The IAIS is engaging with the UNDP Sustainable Insurance Forum, who are exploring the role of supervisors in relation to net zero transition and will consider potential collaboration in 2024.

The next consultation will cover additional supporting material and limited changes to guidance related to various topics, including risk management and investment policy. The feedback received from the series of public consultations will shape an updated and more comprehensive package of climate risk-related material (including updated Insurance Core Principles guidance and an updated application paper). The aim is to help supervisors better incorporate climate risk into all aspects of supervision and for insurers to incorporate consideration of climate-related risks into their governance and operations, and thereby promote a globally consistent approach to addressing climate risk.

To learn more about the other IAIS work in relation to climate risk, including our work on financial stability analysis and on capacity building, visit our dedicated page on climate risk.