Featured Product

    FSI Examines Regulatory Approaches on Climate Risk Assessment

    November 06, 2019

    The Financial Stability Institute (FSI) of BIS published a paper that examines the regulatory approaches being used for climate risk assessment in the insurance sector, in particular through enterprise risk management (ERM) frameworks. The paper describes how some supervisory authorities have undertaken climate risk assessment exercises, focusing on the stress test and the scenario analysis approaches. The paper finds that risk-quantification techniques and models that consider climate risks are more advanced for physical risks, but are still at an early stage for transition and liability risks. Other key policy issues that require consideration include the impact of climate risks on access and affordability of insurance products and the potential use of capital requirements to address climate risks.

    Although efforts have been made by insurance supervisors and insurers in some jurisdictions to better understand climate risks, further efforts are needed. This paper covers climate risk assessment from both regulatory and supervisory perspectives. Based primarily on a survey of 18 insurance authorities, the paper describes the range of regulatory approaches that specify how insurers are expected to assess their climate risk exposures and techniques that supervisors can use to conduct their own assessment of climate risks. Using tools such as stress testing and scenario analysis, supervisors can take steps to better understand how climate risk could impact the financial and solvency position of insurers as well as the financial system.

    The paper highlights that undertaking climate risk modeling and the associated governance processes can facilitate helpful discussion on risk strategy within an insurer, which some may argue as being more important than the numerical results from the models. Although, at present, few authorities undertake supervisory or system-wide stress tests that explicitly cover climate risk, supervisors appear to have a growing interest in including climate-related events in such exercises. Despite technical and operational challenges in undertaking climate risk assessment by insurers and supervisors, it is important to take the first step while recognizing that initial efforts will not be perfect. It remains unclear if capital adequacy requirements are appropriate to address climate risk exposures of insurers. Climate risk scenario analyses or stress tests undertaken by supervisors are not aimed at determining any capital buffers that might be required against longer-term climate risk exposures. Rather, they are used as a learning tool to help insurers prepare themselves for potential future climate scenarios.

    As climate risk quantification techniques mature and insurer risk assessment becomes more accurate, certain policy issues will need to be carefully considered. Looking ahead, there is room to enhance international cooperation among insurance supervisors and other climate-related forums to improve understanding of climate risks and their potential impact on insurers, policyholders, and financial stability. Such initiatives can build on the work done by IAIS, the Sustainable Insurance Forum, and the Network for Greening the Financial System. Supervisors can enhance their technical expertise by taking advantage of the capacity building efforts offered by various international bodies.

     

    Related Link: Paper

    Keywords: International, Insurance, Stress Testing, Capital Requirements, Governance, ERM, Physical Risks, Transition Risks, Climate Change Risks, FSI, BIS

    Featured Experts
    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7311