Climate change: Insurers must do more
Global insurance regulators are urging the industry to better understand and manage the financial risks associated with climate change, Moody's Investors Service reported in mid-March.
“Increased disclosure of climate-related risks will help insurers measure, benchmark and manage their exposure to climate risks,” says Brandan Holmes, VP-Senior Credit Officer at Moody's Investors Service. “It will also encourage them to consider climate risk and sustainability more rigorously in their investing and underwriting decisions,”
The ratings firm targeted five key areas that foster climate risk regulation. They include improving insurers' understanding of climate risk exposure, enhancing governance and testing resilience, and stress testing to identify and improve response. The firm also recommends that insurers adopt more rigorous disclosure requirements and participate more actively in sustainable finance.
Closer regulatory scrutiny of climate risk will benefit insurers because it will push the industry to better evaluate and monitor climate-related threats. More disclosure around climate risk will help benchmark, measure and manage vulnerabilities, Moody's believes.
In January 2021, Canada's Office of the Superintendent of Financial Institutions (OSFI) launched a consultation paper to identify the climate risk exposure of financial institutions, including insurers. It also aimed to better understand how these organizations define, measure, and build resilience to climate-related risks.
Currently, OSFI's governance guidance does not specifically reference climate-related risks, although it does include related principles and expectations. Despite the general requirement for publicly listed companies to disclose all physical risks, climate risks remain less detailed than more rigorous disclosure regimes such as those proposed by the Task Force on Climate-related Financial Disclosures.
In the U.S. and Canada, national regulators have been less explicit in their guidance to insurers on building sustainability into investing and underwriting activities, Moody's reports. The ratings firm expects that US and Canadian regulators’ work on improving insurers' climate disclosure will encourage the industry to pay greater attention to sustainable investing and underwriting.