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    IAIS Consults on Supervision of Climate Risks in Insurance Sector

    October 13, 2020

    IAIS is consulting on the application paper on supervision of climate-related risks in the insurance sector. The draft application paper, which IAIS and the Sustainable Insurance Forum (SIF) developed jointly, provides background and guidance on how the IAIS supervisory material can be used to manage the challenges and opportunities arising from climate-related risks. The key topics and Insurance Core Principles (ICPs) in scope are ICP 7 on corporate governance, ICP 8 on risk management and internal controls, ICP 9 on supervisory review and reporting, ICP 15 on investments, ICP 16 on enterprise risk management for solvency purposes, and ICP 20 on disclosures. The consultation on the application paper ends on January 12, 2021.

    An application papers does not intend to establish standards or expectations, but instead provides additional guidance to assist implementation and provides examples of good practice. This draft application paper aims to promote a globally consistent approach to addressing climate-related risks in the supervision of the insurance sector. This, however, is an iterative and dynamic process given that the understanding of the challenges and opportunities presented by climate-related risks will improve and evolve as the guidance provided is increasingly embedded in supervisory practices. The draft application paper addresses the following issues with respect to the ICPs in scope:

    • ICP 7 on corporate governance. The paper looks at oversight and management responsibilities, business objectives and strategies, the role of the Board, duties related to risk management and internal controls, and remuneration through a climate risk lens (ICPs 7.1, 7.2, 7.5 and 7.6). ICP 7 also discusses Issues around supervisory review and communications are also discussed.
    • ICP 8 on risk management and controls. The paper provides guidance on how supervisors could integrate climate-related risks into their expectations around the risk management system (ICP 8.1) and for each of the control functions (ICPs 8.3 to 8.6). It also discusses the supervision of outsourced functions in relation to climate risks (ICP 8.8). When addressing climate-related risks, it is expected that insurers fully integrate these risks into the overall corporate governance framework, which includes the systems of risk management and internal controls. 
    • ICP 9 on supervisory review and reporting. This principle provides for a natural starting point for supervisors that want to integrate climate-related risks into their supervisory framework, in terms of integrating these risks into supervisory plans, obtaining the necessary qualitative and quantitative information on climate-related risks, and establishing methods for supervisory feedback and follow-up. The starting point would be the assessment of the materiality of climate-related risks to individual insurers and the insurance sector. Common practice is for supervisors to assess the impact of climate risk on other prudential risk classes rather than as a separate risk category
    • ICP 15 on investments. The focus is on how quantitative and qualitative requirements should take account of the climate-related risks that insurers face and to provide guidance related to supervisory expectations on investments. 
    • ICP 16 on enterprise risk management. The paper discusses how climate-related risks can be integrated in an insurer’s underwriting policy and underwriting processes as well as in the Own Risk and Solvency Assessment (ORSA) process, with a focus on stress testing and scenario analysis.
    • ICP 20 on disclosures. In establishing disclosure requirements for climate risks, the paper establishes that a supervisor should consider proprietary and confidential information that could negatively influence the competitive position of an insurer if made available to competitors. The paper discusses those parts of ICP 20 that are deemed most relevant in determining how comprehensively insurers have publicly disclosed the interplay between climate change and their business.

    IAIS and SIF recognize that several ICPs that are not in scope for this paper do have relevance for assessing and mitigating climate-related risks. These may be covered in the future work, or are already covered by other work and include ICPs 14 and 17 on valuation and capital requirements, ICP 19 on conduct of business, and ICP 24 macro-prudential supervision. IAIS also announced that a public background session will be held via webinar on October 26, 2020 to share the background of the draft application paper.

     

    Comment Due Date: January 12, 2021

    Keywords: International, Insurance, Climate Change Risk, ESG, Governance, ICP, Disclosures, ORSA, Stress Testing, Reporting, IAIS

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