Substantialroomforimprovementremainsforinsurerclimateriskdisclosureandmanagement. Insurersandregulatorscaneachplayaroleindrivingthatimprovement.
8.1
Key ReCommenDatIonS FoR InSuReRS
ñ Treat climate change as a corporate-wide strategic issue, affecting all functions, at all
levels, and formalize this in a public corporate policy statement.Climatechangehas
thepotentialtodamagevalueacrosstheinsuranceenterprise—managingitdemands acomparablescopeofcoordination.
ñ Evaluate the potential for changes in future risk exposure due to climate change.
Insurersneedtoassesshowachangingclimatecouldalterextremeweatherevents, diseasevectors,politicalriskandinfrastructureresilience,andadaptaccordingly.
• Support research on the influence of a warming climate on human systems, including forecasting of future catastrophe trends, disease pathways, population migration,
infrastructure failure and adaptive responses.Whilethereisstrongscientificconsensus
onclimatechange,thereisaparticularneedtoadvanceourunderstandingofthelikely impactsofwarmingtemperaturesonphenomenaincludingthefrequencyandseverityof hurricanesandconvectivestorms;thehumanhealtheffectsofmoreintenseheatwaves andexpansionofinsect-bornediseases;andtheeconomicandpoliticalrepercussionsof failedinfrastructureandinundationofdevelopedlands.
• Develop catastrophe models that anticipate the probable effects of climate change on
extreme weather events.Insurerswithdeepscientificresourcesshouldpartnerdirectly
withclimatescientiststodevelopnewmodelingcapabilities.Formanycarriers,withless scientificexpertise,itisequallyimportantthattheimpactofclimatechangeonextreme inlandandcoastalweathereventsbearoutinepartoftheconversationwithcatastrophe modelvendorsandreinsurancebrokers.
• Engage with regulators about how to ensure that rates and loss reserves adequately
reflect changes in loss trends due to climate change.Insurersshouldalsoincrease
theireffortstoofferpreferentialpricingthatreflectsclimate-resilientbehavior.
• Ensure that investment advisors and asset managers have established expertise on
climate change risk assessment and management.Climatechangeisalreadyaltering
extremeeventtrends,withimplicationsforequity,bond,infrastructure,realestateand commoditiesinvestors.Insurersinvestingintheseassetclassesarenolesssubjectto climate-relatedlossesthanotherinstitutionalinvestors,andconsequentlyitisimperative thatinsurersconsiderclimatechangeexpertisewhenselectinginvestmentprofessionals.
ñ Provide transparent, useful disclosure.Disclosureshouldreflectthecompany’sbest
effortstoassessandmanageclimatechange—itshouldthereforeprovideenoughdetail toassistregulatorsinunderstandingwhythecompanytakesacertainviewonclimate change,includingtheassessmentsundertakentoarriveatthatviewpoint.Forglobal enterprises,disclosureshouldclearlydifferentiateactivitiesbeingundertakeninthe UnitedStatesmarketfromthosebeingundertakeninEuropeorothersignificantmarkets.
ñ Inform Public Policy:Promotetheneedforactiontopreventclimatechangeandwork
withpolicymakersatthefederal,stateandlocallevelstohelpthembuildandmaintain aneconomythatisresilienttoclimaterisk.
Climate change has the potential to damage value across the insurance enterprise—managing it demands a comparable
8.2
Key ReCommenDatIonS FoR InSuRanCe RegulatoRS
ñ Continue to mandate annual, public disclosure to foster more active engagement by
insurers on the issue of climate change.Giventhepotentiallysignificantimpactsof
climatechangeoninsuranceavailabilityandaffordability,aswellasoninsurerfinancial health,theimportanceofmandatorydisclosureforregulatorsseekingtounderstand climateactivitiesinthemarketcannotbeunderstated.Thisinformationprovidedin mandatory,publicdisclosurecanhelpothermarketactorsidentifymarket-widefailures inriskmanagementandpushformarketcorrections.Inthisrespect,disclosureresults shouldbeusednotonlybyregulatorsbutalsobyreinsurers,primariesandbrokersto understandthedirectionthemarketismovingwithrespecttoariskfactorthatwill profoundlyshapeindustryperformanceinthecomingyears.
ñ Clarify disclosure expectations.Regulatorscandotheirparttoimproveinsurerdisclosure
byputtingforthguidancedefiningtheimportantconceptsanddescribingtheexpected substanceofinsurerresponsestotheclimateriskdisclosuresurvey.Inaddition,regulators shouldredesignthesurveyformtoelicitmoreusefulresponses—aparticulareffortshouldbe madetolimittheopportunityformultiplequestionstoelicitthesameresponses,andtofocus questionsonriskstothecoreoperationsofinsurers—underwriting,claimsandinvestment.
ñ Build climate risk considerations into the financial oversight processthroughtheaddition
ofclimatechange-relatedquestionstotheFinancialConditionExaminersHandbook. Changinglosstrendsillustratetheneedforfinancialexaminationthatconsidersadjustments toreinsurancecoverageandotherriskmanagementpracticesthatinfluencesolvencytests.
ñ Create more shared resources to help insurers analyze and respond to climate-related
risks and opportunities, including investment risks and opportunities,correlatedrisksand
lossmodeling.Relativelyfewinsurershavetheabilitytoproducefundamentalresearchon thewaysthatclimatechangemayaffecttheirbusiness.Regulatorsshouldhelptoimprove market-wideunderstandingofthewaysclimatecanaffectdifferentareasoftheinsurance enterprise,andincorporatethesetrendsintocompanyexaminationstoprotectmarket capacity.Insurersandregulatorsalikewouldbenefitfrommorefundamentalresearchinthe followingareas,whichemergedasareasofweaknessinthisyear’sdisclosureresponses:
• Investment Risks and Opportunities.Insurerportfolioexposureandclimate-sensitive
assetallocationstrategiesareaparticularneed.
• Correlated Risks.Anassessmentofthepotentialforemergentcorrelatedrisksbetween
investmentsandunderwritingportfolioscouldinformfutureexaminationprocedures.
• Loss Modeling.Regulatorsandcarrierswouldmutuallybenefitfromclarificationonhow
today’slossmodelsincorporateclimateparameters.
• Health and Life Loss Potential.Fundamentalresearchonthetemperaturesensitivityof
morbidity/mortalitystatisticswouldlikelybebeneficialtoinsurers,regulatorsandpublic healthprofessionals.
• Customer Resilience.Regulatorsandinsurershaveamutualinterestinimprovingcustomers’
resiliencetoextremeevents,andidentifyingthemostsuccessfulmethodsofdrivingresilience.
ñ Engage with insurers, consumers and other policymakers to better understand the
nature of climate change risks,includinghowratesshouldadjusttoreflectchanging
risks,andthestepsinsurersandregulatorsneedtotaketobetterincentivizeconsumers toreducetheirvulnerabilitytotheserisks.