The Central Bank of Ireland is seeking comments, until October 26, 2022, on the draft guidance on climate change risks for insurers and reinsurers. The proposed guidance aims to clarify expectations on how insurers and reinsurers address climate change risks in their business and to assist them in developing the governance and climate risk management frameworks.
The proposed guidance sets out expectations on the application of proportionality, where expectations vary by reference to the nature, scale, and complexity of the insurer, including the materiality of the insurer exposure to climate change risk. Recognizing that individual insurers may be at different stages of maturity in their approach to managing climate change risk, the proposed guidance sets out the following overarching principles:
- Iterative approach—The Central Bank of Ireland expects insurers and reinsurers to build capacity and gain experience to integrate climate change risk into their governance and risk management framework. The scope, depth, and sophistication of methodologies are expected to improve over time.
- Climate change is a key risk—The Central Bank of Ireland expects climate change risk to no longer be managed as an emerging risk but as a key risk in its own right within the risk management framework.
- Double materiality—Insurers and reinsurers should consider the impact of “double materiality” on their own activities.
- Own Risk and Solvency Assessment (ORSA)—ORSA is central to adopting an integrated approach to managing climate change risk. The role of ORSA should be broader than the assessment of capital for own solvency needs. Where risks are material, insurers and reinsurers should ensure that scenario analysis is sufficiently comprehensive to enable the setting of strategy, understanding the future business model, and understanding the impact on investments, pricing, underwriting, reserving, and capital.
- Time horizons—Insurers and reinsurers should consider the impact of climate change over the short, medium, and long terms. In relation to the assessment of the materiality of their exposure to climate change risk, and performing climate change scenarios, the Central Bank of Ireland considers short term to be 5 to 10 years, medium term to be 30 years (mid-century), and long term 80 years (end century).
- Group engagement—Where (re)Insurers and reinsurers leverage group policies and activities, they should ensure that these are appropriately adapted for the local entity. The entities should ensure that any plans or actions are consistent with those of the group, including public commitments made by the group.
The proposed guidance is addressed to undertakings authorized by the Central Bank of Ireland as an insurer or reinsurer. The proposed guidance does not introduce new requirements for Insurers and reinsurers in relation to the climate change risk. Rather, the Central Bank of Ireland is seeking to clarify its expectations on compliance with the existing Solvency II prudential requirements relevant to climate change risk. The central bank has also created an infographic to provide a visual overview of the approach to the assessment and ongoing management of an insurer’s exposure to climate change risk set out in the guidance. The Central Bank of Ireland expects to periodically update elements of this guidance to reflect policy changes or other developments stemming from, inter alia, changes to the European Union or the Irish law.
Keywords: Europe, Ireland, Insurance, ESG, Climate Change Risk, Proportionality, ORSA, Solvency II, Scenario Analysis, Central Bank of Ireland
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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