FSI Examines Regulatory Approaches on Climate Risk Assessment
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
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous Article
APRA Licenses Societe Generale As Foreign Deposit-Taking InstitutionRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.