Insurance regulators monitoring risk implications of climate change

BOSTON — Climate change presents risk management challenges to the insurance industry that are increasingly attracting the attention of their regulators, experts say.

“I believe that ignoring the risks from climate change would be like ignoring the risks that technology presents to us,” Andrew Stolfi, administrator of the Oregon Division of Financial Regulation and insurance commissioner in Salem, said during the National Association of Insurance Commissioners’ summer meeting in Boston on Saturday.

NAIC regulators were briefed about the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, which at the request of the G-20 nations finalized in June 2017 a set of final recommendations to guide companies in assessing the material risks climate change poses to their operations and develop plans to mitigate these risks. The recommendations cover four core elements: governance, strategy, risk management, and metrics and targets, and were seen as likely to improve the consistency and depth of corporate climate risk reporting.

“This is a common international framework through which investors and companies can make informed decisions about their exposure to climate-related risks and opportunities,” Chris Fowle, New York-based head of networks for the Principles for Responsible Investment, a United Nations-supported international investor network, said at the NAIC meeting.

The recommendations “are also a means to improve risk management,” he said. “Risk management of climate-related risks and opportunities is increasingly on the radar of financial regulators, and asset owners that implement TFCD recommendations will be at the forefront of any future regulatory changes in their jurisdictions.”

European insurers and reinsurers are leading the way on climate risk disclosure and mitigation, while Japanese insurers are improving their performance and U.S. insurers continue to lag behind, according to a report released in May. Paris-based Axa S.A. was one of the participants in the task force and has pledged to phase out insurance coverage for new coal construction projects and oil sands businesses. On Monday, Munich Reinsurance Co. announced it will no longer invest in shares and bonds of coal companies that generate more than 30% of their revenues in the coal sector, becoming the sixth major European insurer or reinsurer to make such a pledge.

In July, the Sustainable Insurance Forum, a network of insurance supervisors and regulators collaborating to strengthen their understanding of and responses to sustainability issues for the business of insurance, and the International Association of Insurance Supervisors published an issues paper on climate change risks to the insurance sector. The paper emphasized the importance of insurer recognition of the physical risks arising from increased damage and losses from physical phenomena associated with climate trends such as rising sea levels and events such as natural disasters.

“It is important to recognize that insurers may be well-versed in understanding the dynamics of such extreme events and may able to adjust exposures through annual contract re-pricing,” the paper stated.

The paper also outlined transition risks arising from disruptions and shifts associated with the transition to a low-carbon economy, which may affect the value of assets or the costs of doing business for firms. “Transition risks may be motivated by policy changes, market dynamics, technological innovation or reputational factors,” the paper stated.

Climate change may also pose liability risks for insurers, including the risk of climate-related claims under liability policies, as well as direct claims against insurers for failing to manage climate risks, according to the paper.

Insurers should provide aggregated risk exposure to weather-related catastrophes of their property business, meaning their annual aggregated expected losses from weather-related catastrophes, by relevant jurisdiction, according to the recommendations.

Insurance regulators should start to understand and discuss the task force and its recommendations with the companies it regulates, encourage these insurers to report — possibly using the PRI’s “effective” reporting platform — and communicate the benefits of implementing the recommendations, Mr. Fowle said.

California Insurance Commissioner Dave Jones launched the Climate Risk Carbon Initiative in January 2016 to require insurers with $100 million in annual premiums doing business in California to disclose investments in fossil fuels and asked all insurers operating in the state to divest investments in thermal coal. The commissioner launched the initiative because of the potential for investments in fossil fuels to become stranded assets on the books of insurers, meaning they have little or no value amid regulatory and market changes. However, 12 Republican attorneys general and Kentucky Gov. Matt Bevin called the initiative “misguided as a matter of policy, questionable as a matter of law and inconsistent with the principle of comity among the United States” in a letter sent to Mr. Jones in June 2017.

“We are quite confident that to ignore the systemic risk identified by the G20 Financial Stability Board’s task force would be regulatory malpractice,” he said.

California has embraced the recommendations, including a climate-related financial risk stress test and analysis of insurance company investments in fossil fuels.

In February 2017, Geoff Summerhayes, executive board member of the Sydney-based Australian Prudential Regulation Authority, delivered a speech on climate change to the Insurance Council of Australia setting out a new agenda for APRA’s consideration of climate as a prudential risk, according to a case study in the issues paper. Subsequently, APRA has undertaken a number of steps to integrate climate factors across its supervisory approach, with both physical and transition risks being considered.

Climate change is a “very pertinent” issue for the insurance industry and the risk should be assessed even though there are a range of different views or controversy about the issue, Mr. Summerhayes told the U.S. state regulators.