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Climate Change Risk
It has become increasingly clear that climate risk can no longer be considered an emerging risk - the increased frequency and severity of weather related events linked to climate change is being felt across the globe.
The Central Bank has noted that while there is agreement that actions need to be taken there is uncertainty on what those actions should be.
In November 2021, the Central Bank sent a letter to the Chairs and CEOs of regulated undertakings setting out its supervisory expectations in relation to climate and other Environmental, Social, and Governance issues.
Following on from this, given the key role insurance plays in assessing and managing climate change risk as part of its core business activities, the Central Bank is proposing to introduce Guidance for (Re)Insurance Undertakings on Climate Change Risk (the Guidance) in order to clarify its expectations for the assessment and ongoing management of climate change risk by (re)insurers supervised by the Central Bank. The guidance may be extended to other sectors in the future.
Guidance for (Re)Insurance Undertakings on Climate Change Risk
In addition to the detailed guidance the Central Bank has created an infographic to provide a visual overview of the proposed approach to the assessment and ongoing management of a (re)insurer’s exposure to climate change risk - see infographic here.
Recognising that individual (re)insurers may be at different stages of maturity in their approach to managing climate change risk; the proposed guidance is based on a set of overarching principles and sets proportionate expectations dependent on the nature, scale and complexity of the (re)insurer. The overarching principles include:
- Iterative approach - insurers need to build capacity and experience in this area. Sophistication of methodologies are expected to improve over time;
- Climate change risk is a key risk – should no longer be managed as an emerging risk but as a key risk;
- Double materiality - insurers should consider the impact of “double materiality” on their activities;
- Own Risks and Solvency Assessment (ORSA) - The ORSA is central to adopting an integrated approach to managing climate change risk;
- Time horizons – In their assessment of their exposure to climate change risk, insurers should consider the impact of climate change over the short, medium and long term.
- Group engagement – Where insurers leverage group policies and activities, they should ensure that these are appropriately adapted for the local entity.
This Consultation Paper seeks stakeholder views on the proposed Guidance and responses should be provided to the Central Bank no later than 26th October 2022.
In addition to general feedback on the Guidance, the Central Bank would like feedback on the following overarching questions:
- Are there any elements of the materiality assessment, or scenario analysis that stakeholders would like further clarity on and if so please specify which elements?
- Are there any other elements of the Guidance, or terms used, that stakeholders would like further clarity on, including the proposed infographic?
- Are there any items not mentioned in the Guidance that stakeholders think should be included, and if so please specify?