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Insurers must improve climate disclosures after TFCD report shows limited progress

Climate change

The insurance industry has made progress in disclosing the impacts climate change will have on their operations but still has plenty of room for improvement, including in describing how they plan to ensure their organizations are resilient to climate risks, experts say.

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.

The task force’s second status report released on June 5 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 featured in the four core elements: governance, strategy, risk management, and metrics and targets.

The governance category focuses on an organization’s disclosure of climate-related risks and opportunities, including describing board oversight of climate-related risks and opportunities and management’s role in assessing and managing these issues. While the percentage of insurance industry players disclosing on board oversight increased by only two percentage points, more than a third of insurers are now disclosing management’s role in assessing and managing climate risks and opportunities, according to the report.

“There’s quite strong coverage on governance,” said Martin Weymann, Zurich-based head of sustainability, emerging and political risk management at Swiss Re Ltd., a member of the task force that developed the recommendations and has implemented all of them.

Insurance sector players also showed across-the-board improvement in disclosing on strategy, meaning disclosing the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material. For example, the number of insurers and reinsurers describing the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2 degrees Celsius or lower scenario, jumped from 7% to 12% in just two years, according to the report. The 2 degrees Celsius or lower scenario is in line with the Paris climate agreement reached in December 2015, which aims to limit the global temperature increase to below 2 C.

“I thought that was a really good increase,” said Stacy Coleman, a member of the TCFD Secretariat, lead author of the report and managing director of the Promontory Financial Group based in Washington. “Obviously, the levels are still quite low, but that’s consistent across every industry for that particular recommended disclosure. Insurance companies are probably doing scenario analysis more than others. It’s just a matter of whether they disclose the information, which if it isn’t material, there isn’t a need to disclose.”

“What makes it challenging is that many companies just don’t have the experience yet to disclose or don’t feel comfortable at the moment disclosing until they gain some internal experience,” Mr. Weymann said.

Companies have difficulty disclosing scenario analysis assumptions because of concerns about revealing confidential business information, according to the report.

“Scenario analysis is the resounding theme,” Ms. Coleman said, adding that the task force will discuss the topic at a meeting in July and consider guidance to help companies conduct climate-related scenario analysis. “I think insurance companies honestly understand it better than most other companies because they do that type of modeling already.”

The insurance sector also demonstrated across-the-board improvement in the risk management category, which focuses on how the organization identifies, assesses and manages climate-related risks. The percentage of insurance industry players disclosing information related to their risk management processes increased from 24% in 2016 to 33% in 2018, according to the report.

Meanwhile, insurer and reinsurer disclosures declined in areas related to metrics and targets, with the percentage of these companies disclosing climate-related targets dropping from 27% in 2016 to 24% in 2018, according to the report. That 24%, which tied with the technology and media sector as the worst performer in this category, lagged behind the buildings and material sector at 53%, consumer goods at 51% and the banking sector at 50%.

But insurers and other financial services companies are not carbon intensive themselves so the “more troubling” finding for them likely relates to the resilience issue, said Nigel Brook, a London-based partner with law firm Clyde & Co LLP.

“How confident are they that their strategies for dealing with climate change will actually work?” he said.

Insurers also may argue that that identifying climate risk within their operations is “no easy task” because it entails evaluating not just their underwriting books, but their investments and assets and identifying where physical, transition and liability risks are embedded, Mr. Brook said.

“That’s stage one, but of course if you’re acting prudently you should react to that information and take appropriate steps to mitigate the risk,” he said. “Companies may feel that if they just report stage one where they’ve identified the risks but before they decided how to address them … that could expose them.”

Insurers and reinsurers that have not, but want to voluntarily begin to comply with recommendations should not be overwhelmed by the challenges in disclosing, experts say.

“My recommendation would be don’t think you need to start with a full-fledged external report as part of the financial report,” Mr. Weymann said. “To start, it can be only one or two pages where you basically lay out those key elements of governance, strategy, risk management and metrics and targets.”

But insurers and other companies, particularly those in the financial sector, should work on their disclosure practices because regulators will likely start to require such climate disclosures as they seek to protect financial systems from systemic risk, with mounting pressure also coming from ratings firms and activist shareholders and nongovernmental organizations, Mr. Brook said.

“Country by country, insurers will be forced to up their game and forced to report more rigorously,” he said. “Country by country, this will become first the de facto standard and then the actual legal standard for disclosure.”




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