Canadian regulators are closely watching climate change and its potential effects on the soundness of individual banks, insurers, private pension plans and the stability of the financial system as a whole.
Jeremy Rudin, Superintendent of Financial Institutions, told a law conference in Vancouver this week that regulators are keeping a close eye on the physical, liability and transition risks associated with climate change.
When it comes to physical risk, Rudin said the most direct exposure is the potential increase in insurance claims brought on by property damage such as has taken place with wildfires in the West and tornadoes in Ontario.
Can’t be complacent
“Canadian insurers already have a great deal of experience with most of these perils,” said Rudin. “Yet neither the insurers nor we at OSFI can afford to be complacent about the possibility that a sudden increase in the frequency or severity of these events would catch one or more insurers unprepared.”
He said physical risks aren’t an issue just for property insurers. For example, he said, physical risks can hurt the value of physical and financial assets owned by banks, insurers and pension plans, such as commercial real estate and REITs.
Biggest problem will be transition risk
But the biggest risk, said Rudin, will be transition risk as the country moves to reduce greenhouse gas emissions.
“The first round is the impact of the transition on those industries that will see their activities, and quite possibly their entire business models, strongly and directly disrupted. Industries such as fossil fuel production, electricity generation and transportation are likely to be on this list, and there will surely be others. The second round of transition risk arises as the decline in profits and employment in the disrupted industries ripples through the broader economy.”
At the same time, Rudin said if Canada moves to an economy with low greenhouse gas emissions, it can create new economic opportunities for financial institutions.
