The Geneva Association – Anchoring climate change risk assessment into key insurance business decisions

Over the past few years, we have witnessed significant regulatory developments regarding climate change in many jurisdictions, with significant implications for companies’ efforts to assess and disclose the impacts of climate change on their business models. Mandatory regulatory requirements for climate disclosure over the next few years are imminent. In addition, the development of global benchmark standards for sustainability reporting, with a focus on climate change, is underway by the International Financial Reporting Standards Foundation’s International Sustainability Standards Board (IFRS-ISSB).

In 2020, the Geneva Association launched a working group on climate change risk assessment for the insurance sector (the GA working group). In its first two reports, the GA Task Force:

  • Concluded that prescriptive quantitative regulatory exercises to date are resource-intensive and do not provide useful information for decision-making, given the significant uncertainties associated with the transition to a carbon-neutral economy
  • Highlighted the need to develop forward-looking climate change risk modeling and scenario analysis methodologies relevant to decision-making with a holistic approach, using a combination of qualitative and quantitative approaches.
  • Called on regulators and standards bodies to clarify their regulatory objectives and key issues
  • Encourage closer collaboration among regulators and with the insurance industry to accelerate convergence of best practices and baseline reporting requirements.

Aimed at board and senior management of re/insurers (P&C and life) and the regulatory community, the third report offers new insights into regulators’ mutual priorities and related issues for re/insurers, as well as as strategic guidance on how to embed climate change risk assessment into core business decision-making to take a holistic approach.

Developing a decision-relevant climate change risk assessment with a holistic approach requires an exploratory, iterative and adaptive process that will take time. A holistic approach considers the materiality of physical, transition and litigation risks and their interactions at different time horizons (short and long term) on both sides of the balance sheet, including interactions between business functions and feedback loops decisions. With each iteration, companies can increase complexity by assessing the interactions of physical, transition, and litigation risks, exploring how these risks manifest within and across business functions, and developing potential actions to address them. face.

The latest developments reveal that regulatory and supervisory approaches are increasingly evolving in line with earlier recommendations of the GA Task Force. This is a unique opportunity for regulators to further clarify their common goals and mandates and strengthen their collaboration with industry. Responses from 11 regulators to a Geneva Association survey reveal eight major regulatory priorities: policyholder protection, insurer financial health, corporate governance and strategy, insurability and affordability of insurance solutions, financial stability, risk awareness, data/risk assessment services and environmental stewardship.

Re/insurers around the world are at different stages of assessing the impacts of climate change risks on their business model, with distinct trends by jurisdiction, line of business and company size. While re/insurers in all lines of business have begun to explore the materiality of climate change risks on either side of the balance sheet, for life and health re/insurers in particular, further research is needed to assess the attributions and the materiality of climate change to their underwriting of exposures over various time horizons.

It is important that boards and senior management strive to harmonize and align their “inside-out” assessments of climate change with their “outside-in” approaches. to develop viable climate transition goals, strategy and plan. Companies also carry out in-depth analyses, i.e. assess the impact of their actions on the climate in setting their climate objectives using scientific approaches such as those introduced by the UN Net-Zero Asset Owner Alliance and the Science-Based Targets initiative. A growing number of critics are pointing to the possibility of greenwashing, which could lead to potential risks of reputational and climate-related litigation, and even regulatory action.

Boards and senior management also need to consider four key questions to strategically steer internal processes toward a more holistic approach.

Developing and using business use cases helps frame analysis, engage experts in relevant business functions, leverage and use the same data and tools across the enterprise, and explore how risks and their interactions can manifest themselves in business functions and decision feedback. loops. The full report provides a 10-step model to help companies design business use cases and offers three examples.

Scenario analysis is a tool for performing a forward-looking assessment of risks and opportunities, where the business can systematically explore individual or combined factors and make strategic decisions in the face of significant uncertainties, for example:

  • Testing the resilience of a company’s business model in the face of climate change risks
  • Assess the implications of possible actions a company can take
  • Stress test of the company’s business model under extremely adverse conditions

The company can explore the type of scenarios that may be applicable by first constructing a range of “What if?” » qualitative. questions, and then looking at areas where quantitative methods may be viable. The Geneva Association report provides an overview of several reference scenarios that are currently the most used in the financial sector.

Diagram of the iterative process of designing and using business use cases to frame climate change risk assessment

Through close collaboration with the industry, re/insurers should perform an analysis of existing data challenges, gaps and needs, and define priority areas and requirements for future tool development. Life and health re/insurers are still struggling to identify the types of data that would help extract climate change attribution and liability exposures. A

Dr. Maryam Golnaraghi is Director of Climate Change and Environment at the Geneva Association.

The Geneva association

Martin E. Berry