2022 will be remembered as a year of unprecedented progress in climate reporting regulation around the world. The emerging trend is clear – reporting on climate risks and impacts will no longer be voluntary or on a purely ‘best effort’ basis.
The significant developments in the last year mean that climate reporting will soon become mandatory in many jurisdictions. In the European Union, the requirements will take the shape of the European Sustainability Reporting Standards (ESRS). In the US, the Securities and Exchange Commission’s (SEC) proposed Climate Change Disclosures will form the requirements. In the UK, the first wave of companies has started to report under the Task Force on Climate-Related Financial Disclosures (TCFD) framework, which will also eventually become mandatory in other jurisdictions.
Beyond reporting compliance, insurers have begun to understand the impact climate could have on risk management, strategy, and their overall business. Many have already been working on developing, implementing, and improving their climate and ESG-related data, models, systems, and processes.
Moody’s Analytics recently conducted one to one interviews and a survey of 30 insurers from Europe and North America, with some response from Asia and Australia. The aim of the survey was to determine the current level of climate integration into their risk management and reporting processes. We also wanted to learn more about insurers plans in this area. Our respondents came from a range of insurance businesses including Life, Health, P&C, Reinsurance, and other related financial institutions.
This report shares our learnings from the survey, covering current insurance market trends in developing climate capabilities, adopting climate scenarios, and addressing data gaps. We also share the insights and feedback from recent one-to-one discussions with insurers on the same topic. The report complements the findings from our survey published in September 2022 ’Life Insurers: Climate Risk Modelling and Risk Assessment Process’.1
Key lessons learned
Many large insurers have begun climate reporting in the last few years. Not surprisingly, the most popular voluntary framework has been the TCFD. Insurers are also able to join the climate-related industry organizations such as the Net-Zero alliances (Net-Zero Asset Owners Alliance or Net-Zero Insurance Alliance). Perhaps due to the awareness that regulatory changes will soon mandate the reporting standards developed by the International Sustainability Standards Board (ISSB), SEC, and the European Financial Reporting Advisory Group (EFRAG).
One of the most difficult, but useful climate exercises is scenario analysis. Insurers plan to use, or are already developing, multiple scenarios, which often require customization, and consideration for changes such as portfolio mix over time. After its implementation, climate scenario analysis can serve several important needs; reporting compliance, but also regulatory stress testing, strategic asset allocation, and the Own Risk and Solvency Assessment (ORSA).
There are gaps in key data availability. In particular around Scope 3 Greenhouse Gas (GHG) emissions, which relate to emissions from sources that are not owned or controlled by the reporting entity. Insurers are currently unable to completely assess emissions from their investments, in particular from alternative assets. While this part of the balance sheet remains a challenge, P&C insurers are starting to turn their attention to underwriting emissions from their insurance contracts.
Integrating climate into risk management, strategy, and reporting will require significant changes to existing data, systems, and processes. Some insurers indicated that they might need to build new tools and models. The majority plan to use their existing systems. However, this will still require significant enhancements; such as emission data collection, or stress testing their strategy’s resilience to various climate shocks, over the short-, medium-, and long-term.
Climate risk management and reporting are already starting to shape insurers’ organizational structure. Many have created sustainability functions to lead the process. Groups are also starting to involve their subsidiaries, as more detailed climate data is required for granular analysis.
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1 Life Insurer Survey Report: Climate Risk and the ORSA