The Central Bank of Ireland warned Irish-based insurers and reinsurers on Wednesday that there needs to be a “step change” in how they are responding to climate change risks on their business, as less than half of such firms are carrying out some form of proper scenario analysis or stress testing.
“Climate change is no longer an emerging risk — the stakes are high, not just for the future viability of the insurance sector, but also for society as a whole,” said Central Bank governor Gabriel Makhlouf as the regulator outlined plans to introduce guidance on climate change risks for the sector.
“Central Bank expects to see a step change in the way that (re)insurers are responding to climate change risks, and we look forward to further and continued engagement with stakeholders on this important topic.”
While the regulator has found from its discussions with insurance firms that the sector is aware of risks arising from climate change — amid an increase in frequency and severity of weather-related events globally — there is a general uncertainty about what needs to be done and where to begin, it said.
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A survey carried out by the Central Bank last year found that only 20 per cent of insurers or reinsurers fully integrate climate change risk in their risk management framework, with less than half of the 92 firms conducting some form of scenario analysis or stress testing.
The regulator is proposing that insurers should, in the first instance, carry out a formal exercise to identify and assess their risk exposure to climate change, including a baseline scenario.
Firms should consider the impact of climate change on their activities as well as the effect of their own business on the climate — or what is known as “double materiality”, it said.
The Central Bank will also expect firms to “appropriately consider” climate change risks in measuring their technical provisions, to deal with expected claims losses, and capital, to handle unexpected events, as well as when it comes to writing and pricing insurance.
