Climate change risk management for insurers
Climate change is expected to pose a serious risk for (re)insurers and society in the future. Without intervention, global average temperatures are expected to keep rising, along with the associated physical risks. This could increase (re)insurers' underwriting risk, challenge business strategies and negatively impact asset values. Regulators worldwide have made significant progress in providing guidance to (re)insurers on how to take account of climate change risk.
EIOPA expects (re)insurers to integrate climate change risk in their governance, risk management framework and ORSA and to perform climate change scenario analysis over the short and long term. (Re)insurers are expected to perform materiality assessments on a broad range of climate risks and analyse scenarios relevant to their portfolio. EIOPA will begin to monitor the application of their ORSA Opinion from April 2023.
The BMA similarly expects (re)insurers to address climate change risk in their governance, risk management framework and GSSA/CISSA. BMA will begin to monitor progress on the guidance during 2023, and the framework should be fully adopted by year-end 2025. BMA expects an implementation status update and at least a climate risk exposure analysis in the year-end 2022 ORSA, with continuous advancements in scenario analysis up to 2025.
How does Finalyse address your challenges?
Governance:
Integration of climate change risks in the ORSA, governance and risk management systems.
Risk identification:
Identification of a range of climate change risk exposures and materiality assessment of your portfolio.
Mapping of risks:
Mapping the identified climate change risks to traditional prudential risk categories for (re)insurers.
Scenario definition:
Defining relevant climate scenarios for ORSA, leveraging online resources referenced by EIOPA (e.g. NGFS and IPCC).
Modelling of risks:
Modelling the risks for your scenarios, translating the climate projections into financial and underwriting impacts.
ORSA approach:
Defining modelling approach for ORSA scenarios, e.g. balance sheet stress tests versus projections over short or long term.
How does it work in practice?
Risk management framework for climate change risk:
Mapping of climate change risks:
Key Features
- Benefit from Finalyse’s extensive experience and expertise in the area of risk management for insurers.
- Development of a risk management framework that integrates climate change risk in your governance, risk-management system and ORSA.
- Support in complying with the ever increasing regulatory burden and alignment with the market practice.
Our subject matter experts
Yannis is a qualified actuary with experience in risk management, actuarial modelling and capital management for insurers. He has acquired in-depth knowledge of the insurance sector through the performance of key roles such as CRO and Head of Actuarial Function. He is a subject matter expert in the fields of Solvency II, Risk Appetite Frameworks, Balance Sheet Valuation and ORSA projection models.
Frans is an actuary and Financial Risk Manager with international experience in the pensions and insurance sectors. He has been specialising in actuarial valuations, financial reporting, risk management, asset-liability modelling (ALM) and investment consulting.
Evelyn McNulty is a qualified actuary with 12 years’ experience in the life insurance industry. Evelyn has a broad range of experience including financial and regulatory reporting (Solvency II, IFRS 17, GAAP, MCEV), capital modelling (SCR, ORSA) and leading client audits. She also has data analysis and process improvement experience, with proficiency in VBA and familiarity with SQL, Prophet and InvestPro.
What Finalyse experts say
Climate change poses a serious risk for society and for (re)insurers, with the harmful impact of global warming already being visible. Without further international climate action, global average temperatures and the associated physical risks will continue rising, resulting in increased underwriting risk of insurers, impacting asset values, and challenging their business strategies. On the 5th October 2020, the EIOPA has published a consultation paper on the use of climate change risk scenarios in the ORSA in the form of a draft supervisory Opinion. The consultation is a follow-up to the Opinion on Sustainability within Solvency II released in September 2019 which recommended that (re)insurers should consider climate risks beyond the one-year time horizon within their system of governance, risk-management system and ORSA.
ReadThis article introduces the reader to the taxonomy regulation. The taxonomy regulation is intended to identify the investments, that are contributing towards the EU climate goals as expressed in the European Green deal. Against the backdrop of COVID 19, it is very likely that the taxonomy will serve as an important funnel for the stimulus/recovery money. However, given the strictness of the EU plans it is likely that the investments that qualify under taxonomy will be supported even further in the future, whereas the investments that do not may experience some adverse treatment. The taxonomy, therefore, is an important glimpse to the future. Read this paper in order to find out more about the basic principles underpinning the Taxonomy.
Read