Climate risk
Climate change is a source of financial risk, impacting the resilience of individual insurers as well as global financial stability. While insurers are exposed to both transition and physical risks through their underwriting and investment activities, they can also be key agents in identifying, mitigating and managing climate risk, thereby contributing to a sustainable transition to net-zero.
Therefore, climate change is a key theme within the IAIS Strategic Plan. The IAIS’ work on climate change spans across many activities such as financial stability risk assessment, development of supervisory and supporting material and capacity building.
Financial stability
The Global Monitoring Exercise (GME) allows the IAIS to monitor and assess global insurance market trends and developments and their potential impact on insurance markets and global financial stability. In 2021, the IAIS published a special topic edition of the Global Insurance Market Report (GIMAR) on the insurance sector’ investment exposures to climate-related risks. This report provided the first quantitative global study on the impact of climate change on the insurance sector.
Since then, climate risk data elements have become a regular feature of the IAIS’ GME and provide a global baseline of climate risk data for the insurance sector. The outcomes of the analysis are published annually as part of the regular GIMAR.
Standard setting and supervisory practices
The IAIS work in this area focuses on promoting a globally consistent supervisory response to climate change and providing supervisors with the necessary tools to monitor, assess and address climate-related risks to the insurance sector.
In previous years, together with the UN-convened Sustainable Insurance Forum (SIF), the IAIS published several papers:
- May 2021: Application Paper on the Supervision of Climate-related Risks in the Insurance Sector
- February 2020: Issues Paper on the Implementation of the Recommendations of the FSB Taskforce on Climate-related Disclosures (TCFD)
- July 2018: Issues Paper on Climate Change Risks to the Insurance Sector
Since then, the IAIS continues to closely monitor developments in global climate change mitigation efforts, climate science and supervisory practices to manage climate-related risks. In 2022, the IAIS performed a gap analysis of existing IAIS supervisory materials to assess how climate risk is already captured and to identify possible further work in terms of standard setting and providing further guidance on supervisory practices. In consideration of the gap analysis outcome, the IAIS is conducting a series of public consultations to present new and updated supervisory and supporting materials.
The first consultation in March 2023 outlined proposed changes to the ICP Introduction, which positions climate risk within the global framework for insurance supervision. Additionally, the IAIS discussed whether it was necessary to make changes to the existing supporting materials related to governance, risk management and internal controls (ICP 7 and 8). Finally, the consultation included questions seeking stakeholder feedback on the overall climate-related work as it related to supervisory guidance.
Recent and upcoming events
Related
documents
- November 2023 – A call to action: the role of insurance supervisors in addressing natural catastrophe protection gaps
- August 2022 – IAIS response to ISSB climate exposure draft
- Oct 2021 – IAIS Public statement on climate
- July 2021 – Launch of the Climate Training Alliance
- Dec 2020 – IAIS Environmental Policy
The second consultation in November 2023 focused on supporting materials addressing issues related to market conduct and scenario analysis.
The third consultation, issued in March 2024 puts forward proposed changes to reflect climate risk in selected ICP guidance material and supporting material relating to corporate governance, risk management and internal controls, valuation of assets and liabilities for solvency purposes, investments activities of insurers, and insurers’ enterprise risk management framework.
The fourth and final consultation in this series included supporting material related to supervisory review and reporting, public disclosure, macroprudential supervision and supervisory cooperation.
The final sets of materials, which take on board comments received during the consultation periods, will be published in 2025.
Capacity building
Climate Training Alliance
The IAIS is proud to be one of the launching partners of the Climate Training Alliance (CTA), a dedicated online portal for training on climate risks for central banks and supervisors. The CTA is a collaboration between the Bank for International Settlements, the IAIS, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) and the UNDP Sustainable Insurance Forum (SIF). It allows easy and free access for all IAIS members to climate risk trainings, including those based on IAIS supervisory and supporting materials. For instance, it includes a dedicated training programme on climate scenario analysis.
Natural Catastrophes Assessment Tool
One of the main effects of climate change on insurers is through the expected increase in natural catastrophes (NatCat)-related claims. To assess the potential risks associated with this trend, as a first step, supervisors need to have the data and tools to understand and monitor insurers’ current exposure to NatCat. As a second step, supervisors need to consider how climate change, in conjunction with other relevant developments (such as an increase in exposure in high-risk areas and possible adaptation actions), may impact the cost of NatCat coverage in the medium to long term.
To help supervisors assess the potential materiality of NatCat risks and how climate change may impact them, the IAIS has commissioned CLIMADA Technologies to develop a tool based on CLIMADA, an open source global NatCat model covering the key climate-related insurance NatCat perils. This tool provides IAIS members with estimates of the NatCat damages at different return periods at a country and US state level, as well as average annual loss (AAL) across more than 250 individual territories using the LitPop global high-resolution asset exposure dataset. In addition, the tool provides estimates about how climate change may impact the above metrics by 2030, 2050 and 2080 under Representative Concentration Pathways (RCP) 8.5 (the pathway with the highest assumed greenhouse gas emissions) and based on unchanged exposure.
IAIS members have free access to the tool and are encouraged to reach out to Miroslav Petkov for further information.
Partners
The IAIS works closely with various partners in addressing the risks and opportunities from climate change. Since its inception in 2017, the SIF has been a key strategic partner.
The IAIS also collaborates with other international organisations and standard setting bodies on climate risk issues, including the Financial Stability Board (FSB) and the NGFS:
- The IAIS contributes to the FSB Roadmap for Addressing Financial Risks from Climate Change. A progress report was published in July 2022.
- The IAIS became an observer of NGFS in 2019, to coordinate a global response to the financial risks from climate change.