Application paper on the supervision of climate related risks in the insurance sector

Climate change is recognised as an overarching global threat. It impacts human, societal, environmental and economic systems through rising temperatures and their consequences, including rising sea levels and an increasing frequency /severity of natural catastrophes and extreme weather events. Climate change, as well as the global response to the threats posed by climate change (eg the reduction of greenhouse gas (GHG) emissions and adaptation programmes) may have wide-ranging impacts on the structure and functioning of the global economy and financial system.

Climate change and climate-related risks are also a source of financial risk. Climate-related risks are
material for the insurance sector as they potentially impact the insurability of policyholder property
and assets as well as insurers’ operations and investments. Climate-related risks may translate into
prudential risks to insurers, as outlined in Table 2, and therefore impact the resilience of insurers as
well as other financial institutions and financial stability.

GHG emissions continue to increase and are estimated to lead to global warming significantly above
the target of 1.5°C4. Given this challenging situation, there is a likelihood of a delayed and divergent
transition and/or global warming well beyond the current target. Either scenario will likely have a
considerable impact on the insurance sector by increasing physical, transition, liability and
reputational risks to the insurance sector. Therefore, climate change as a cause of an overarching
global threat and a source of financial risk is increasing. It is critical for insurance supervisors to
strengthen their understanding of the type and magnitude of climate-related risks and exposures of
the insurance sector to effectively identify, monitor and reflect climate change risks in their
supervisory responsibilities.

Climate change also presents opportunities for the insurance sector: the insurance industry plays a
critical role in the management of climate-related risks in its capacity as an assessor, manager and
carrier of risk, and as an investor. For example, insurers provide critical economic signals regarding
the changing risk environment through risk-based pricing, and also help build resilience through risk
mitigation efforts and insurance coverage.

source:

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