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Insurers are improving their disclosures of their climate-related risk management efforts, but continue to lag other major industries in reporting climate metrics and targets, according to a new report.
The Financial Stability Board’s Task Force on Climate-related Financial Disclosures 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 at the request of the G-20 nations. 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.
The task force’s second status report released on Wednesday entailed an artificial intelligence review of disclosures of several major industries, including the insurance sector, which covered disclosures from 147 insurers in four categories – multiline insurance, property/casualty insurance, life and health insurance and reinsurance – ranging from $200 million to about $2.7 trillion in assets.
Insurers’ disclosure of information in alignment with task force recommendations increased from 2016 to 2018 for nine of the 11 recommended disclosures, including disclosures on risk identification and assessment processes, risk management processes and integration into their overall risk management processes. For example, the percentage of insurers disclosing information related to their risk management processes increased from 24% in 2016 to 33% in 2018, according to the report.
But the insurance industry still lagged other major industries in terms of disclosure in key areas, according to the report. For example, while the 33% figure represented improvement for the insurance industry, insurers’ disclosure of their risk management processes fell behind the banking sector at 46%, the energy sector at 42% and the materials and buildings sector at 39%. The insurance sector did outperform other industries in this category, including the transportation sector at 17% and the agriculture, food and forest sector at 26%.
Meanwhile, insurer disclosures declined in certain areas related to metrics and targets, with the percentage of insurers disclosing climate-related targets dropping from 27% in 2016 to 24% in 2018, according to the report. The insurance industry, which tied with the technology and media sector as the worst performer in this category, lagged behind the materials and buildings sector at 53%, consumer goods at 51% and the banking sector at 50%.
Overall, the average number of recommended disclosures per company has increased by 29% from 2.8 in 2016 to 3.6 in 2018, according to the artificial intelligence review of reports from more than 1,100 large companies across multiple sectors in 142 countries. In addition, the percentage of companies that disclosed information aligned with at least one of the task force’s recommendations rose from 70% in 2016 to 78% in 2018.
But challenges remain in disclosing scenario analysis assumptions as companies preparing disclosure reports find them difficult due to their inclusion of confidential business information while a lack of standardized metrics and targets also complicates the disclosure process for them, according to the report.
Meanwhile, the top area identified by users of climate-related financial disclosures as needing improvement is for companies to provide more clarity on the potential financial impact of climate-related issues on their businesses, according to the report. “Without such information, users may not have the information they need to make informed financial decisions,” the report stated.
The task force will deliver its next status report to the Financial Stability Board in September 2020.
The European Central Bank said that extreme weather accounted for more than 80% of insured catastrophe losses in 2018 and called on financial institutions to correctly price climate change-related risks, Reuters reported. The European Central Bank called for reliable and comparable data to set up a climate risk assessment framework and mitigate threats to assets and insurance liabilities.