Guidance for (Re)Insurance Undertakings on Climate Change Risk

The following are the key areas outlined for re(insurers) to integrate climate change risk: Appropriate Governance, Materiality Assessment, Scenario Analysis, Strategy & Business Model, Risk Appetite & Risk Management and Reporting.

The issued guidance is largely unchanged from the proposed guidance (August 2022) and it is designed to clarify for (re)insurers their expectations to address climate change risk in their business and assist them in developing appropriate governance and risk management frameworks, which consider and address climate change risk. The guidance should be read in the context of Solvency II and in conjunction with relevant European and Irish legislation, regulation and guidelines.

Read the full guidance

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The CBI expects that all (re)insurers, whether large or small, should assess and manage the climate change risks they are exposed to, and consider the impact that they are having on the climate, from business activities and investments over the short, medium and long term. Ultimately, the CBI expects climate change risk to be managed in a similar way to other key risks, acknowledging that that (re)insurers will need to build capacity and gain experience to integrate climate change risk into their governance and risk management framework. In order to help (re)insurers to visualise the interlinkages between the different elements of the Guidance, the Central Bank has developed an infographic which is intended to be read alongside the Guidance.

The Central Bank acknowledges, there will be challenges for (re)insurers in certain areas for example in data availability, or modelling and monitoring capabilities. The CBI suggests (Re)insurers should identify any additional data needs and the level of granularity of that data, alongside any data management tools required to support the climate change risk strategy.

The expectations are set out through key themes:

Appropriate Governance: Good governance is expected to form the foundation upon which (re)insurers respond to and integrate climate change risk into their risk management framework. The CBI expects (re)insurers to have appropriate governance frameworks to identify and manage climate change risk effectively, with roles and responsibilities related to climate change risk clearly identified, documented, communicated, and understood and ensure the remuneration policy is consistent with the objectives of the (re)insurer’s business and risk strategy in relation to climate change risk.

Materiality assessments:  An important starting point for (re)insurers in understanding the potential impact of climate change is the assessment of the materiality of their exposure to climate change risk. The following components should be considered in conducting materiality assessment:

1. The (re)insurer’s view of the future from a climate change perspective, i.e. Baseline Scenario, and;
2. The (re)insurer’s strategy and business model.

Other considerations include physical and transition risk drivers, quantitative and qualitative approaches, varying time horizons all of which should be documented alongside any conclusions reached.

Scenario Analysis and Own Risks and Solvency Assessment (ORSA): The CBI considers the ORSA an appropriate process to include the consideration of the financial impact of a material exposure to climate change risk through stress and scenario analysis, but (re)insurers may use other approaches that achieve the same outcome. The CBI expects (re)insurers to use an appropriate level of scenario analysis to assess the financial impact of any material exposure to climate change risk and to develop their fundamental understanding of their exposure to climate change risk including, both their exposure through (re)insurance activities, investments and their own exposure in order to manage operational risk.

Strategy and business model: The CBI expects that (re)insurers take appropriate actions to fully assess the potential impact of climate change risks on their business models and to integrate climate change risk in its overall strategy. Moreover, the CBI expects that, where (re)insurers’ are part of a group, their plans are consistent with any climate change related commitments made by the group Lastly, the CBI expects that (re)insurers consider climate change risks in their ongoing strategic decision-making and that these are appropriately integrated into the business models.

Risk appetite statement (RAS): (Re)insurers are expected to align their risk appetite statement with the overall strategy, including specific climate change risk exposure limits and thresholds as well as consideration of the long-term financial interests of the (re)insurer.

Embedding climate change risk considerations across the business: It is expected that actions set out in a strategy and business model, are operationalised in the business as usual (BAU) activities of the (re)insurer. These BAU activities include ongoing risk management, underwriting and pricing, reserving and capital, and investment decisions.

There are important links between the different elements of the Guidance, as such, the Central Bank expects that (re)insurers consider the Guidance as a holistic approach (framework), not as discrete sections in isolation. This guidance is a step forward for the insurance sector that has an important role to play in the transition to a sustainable future.

What Next? 

Insurance undertakings and insurance distributors need to become familiar with the changes and analyse how they will comply with the new obligations. Following a gap analysis, undertakings will then need to review and update their existing business plans, systems and policies to incorporate Climate Change Risk into their daily operations.

How can we help?

Grant Thornton’s Financial Services Risk, Consulting and Advisory teams are comprised of dedicated experts who are experienced in supporting insurance firms with a variety of regulatory challenges, including those arising from the ESG agenda.

In particular, our industry-leading Prudential Risk Team and our ESG and Climate Risk experts understand that regulation continues to drive the strategic agenda for insurance firms. ESG and other sustainability related areas are likely to be high on the regulatory agenda for years to come. They specialise in assisting clients across the financial services sector in navigating through the maze of regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.