IAIS calls on insurers to intensify climate risk scrutiny
The group aims to raise awareness for insurers of the challenges presented by climate change and how to respond.
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Intensifying climate risks such as extreme weather events present significant challenges for the insurance sector and warrant “ongoing and intensifying scrutiny” by supervisors, according to a new paper from the International Association of Insurance Supervisors (IAIS) and the Sustainable Insurance Forum (SIF).
The “Issues Paper on Climate Change Risks to the Insurance Sector” marked the first effort by an international financial standard setting body to assess how climate change risks may affect financial institutions.
Clear insurance gap for weather-related losses
According to the paper, physical, transition and liability risks as well as figures on extreme weather events point to a growing trend of damages, both for insured and uninsured goods. In 2017 alone, a series of major hurricanes and other natural disasters brought insured losses to a peak of $138 billion.
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Overall economic losses from natural disasters in 2017 amounted to a total of $340 billion — the second highest annual figure ever recorded — drawing attention to what the paper called a clear insurance gap for weather-related losses. Eighty-three percent of these losses were concentrated in North America.
The paper also noted that losses from wildfire in 2017 were by far the highest ever recorded during a single year. In California, for example, insured losses from wildfires reached $13 billion, stemming from damage to 21,000 homes and 2,800 businesses.
‘Critical emerged risk facing the insurance sector’
“Climate change is now recognized as a critical emerged risk facing the insurance sector. The Issues Paper is an important resource and capacity building tool for supervisors and insurance firms alike. Going forward the SIF will continue to work in partnership with IAIS to help strengthen strategic responses and it’s leadership on climate risk,” Geoff Summerhayes, the SIF chair, said at the IAIS executive committee meeting in Moscow, where the paper was adopted. “The Issues Paper is an important resource and capacity building tool for supervisors and insurance firms alike. Going forward the SIF will continue to work in partnership with IAIS to help strengthen strategic responses and its leadership on climate risk.”
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Developed over seven months since IAIS committee meetings in Kuala Lumpur, where the IAIS confirmed climate and sustainability issues as a strategic priority, the paper aims to raise awareness for insurers and supervisors of the challenges presented by climate change and how to respond.
Approaches to address climate change risks
It sets out a three-pillar framework of observed approaches to address climate change risks that supervisors may consider in designing and implementing their own efforts. Drawing on an internal survey, the paper sets out 10 state-of-the-art approaches undertaken by SIF members – including Australia, Brazil, France, Italy, the Netherlands, Sweden, the United Kingdom, and the U.S. states of California and Washington States.
A public consultation on the paper was undertaken in April. Several hundred comments were received from 20 registered respondents — including market associations, insurers and reinsurers, supervisors, and NGOs. The compiled comments on the document and list of responses are available on the IAIS website.
Over coming months, the paper will be translated into all UN languages (Arabic, Chinese, English, French, Russian, and Spanish) plus Portuguese. The SIF also will develop templates for supervisors to facilitate outreach efforts with firms, and encourage adoption of best practices.
Spearheading best practice in area of climate risk assessment
“I am proud that the IAIS is showing leadership by adopting this paper on climate risk issues, which are critically important for our members,” said Victoria Saporta, chair of the IAIS executive committee. “Thank you to the SIF for advancing our partnership — and showing that this challenging work can be done in a short time. We look forward to working with the SIF to support outreach on this paper.”
“We’re delighted that this paper has come together so well, thanks to the hard work of our members in the SIF and the partnership with UN Environment,” Jonathan Dixon, Secretary-General of the IAIS, added. “As an association, we recognize the value that the SIF brings to the IAIS membership — and look forward to tackling other climate and sustainability related issues in partnership.”
“This paper represents the culmination of months of hard work by SIF member supervisors, who are spearheading best practice in the complex area of climate risk assessment, scenario analysis and stress testing,” said Jeremy McDaniels, the SIF secretary, stated. “On behalf of the SIF Secretariat and UN Environment, I thank the IAIS for its support in developing this landmark document — which can help orient the work of supervisors in other sectors. I’m very excited to work with our members on new challenges, including practical supervisory tools for climate change risks.”
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Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc.