The coal industry and climate change are inextricably linked. As a result, underwriting and investing in coal presents a number of business risks to insurers.
These include underwriting risk, strategic risk, investment risk and reputational risk. Many are set to be identified and discussed in an ‘issues paper’ on climate change from the International Association of Insurance Supervisors (IAIS).
The IAIS is a voluntary association of insurance supervisors from around the world with members from over 200 jurisdictions. It is an influential international body with responsibility for developing principles, standards and other supporting material for the supervision of the insurance sector. The ‘issues paper’ is currently open for public consultation with comments being due by 29 April 2018.
Why is this paper important?
This is the first time that climate change has been addressed in detail by the IAIS. While the issues paper will not set supervisory expectations in its own right, it may be the first step in developing international supervisory standards and recommendations. Identifying and managing the risks of underwriting and investing in coal is a crucial component of tackling climate risk more generally.
What does the issues paper cover?
The issues paper aims to raise awareness of the risks posed by climate change among insurers and regulators. In doing so, it intends to address the following:
- How climate change is affecting the insurance sector today, and how it may affect the insurance sector in the future.
- Examples of current material risks and impacts with respect to underwriting and investment.
- Descriptions of how these risks may be relevant to the supervision and regulation of the insurance sector.
- A comparison of current and contemplated supervisory responses to climate risk, with examples.
- Identification of gaps and emerging areas which need to be resolved to allow for effective supervision.
- Preliminary insights from practice, and initial conclusions relating to the supervision of climate risk.
It is notable that the current draft paper specifically references the Insure Our Future campaign under its discussion of reputational risks. It is clear that the mounting pressure from social movements may pose material reputational risks to insurance companies that need to be managed. Insurance companies can expect increasing public scrutiny of their role in supporting the coal industry.
Last year, Sustainable Insurance Forum (SIF), which helped develop the draft paper, acknowledged that “climate change is one of the most serious long-term challenges for the insurance sector and the wider financial system”. The SIF is a network of leading insurance supervisors and regulators convened by the United Nations. At the same time, SIF members requested a guidance document that addressed climate change and insurance supervision. The draft issues paper is a result of that request.
This is timely, given the increasing scientific consensus around the influence of climate change on extreme weather events. According to Swiss Re’s Sigma study, 2017 set a record for the highest natural catastrophe insured losses at $144 billion. This initiative dovetails with other recent developments in this space such as the European Commission’s action plan on sustainable finance.
Given the global nature of climate change, international forums such as the IAIS and the SIF have the potential to play a significant role in addressing climate risk. The fact that these organisations are looking into this underlines the significance of the risks facing the industry, and the importance of developing systems to manage that risk effectively.
With any luck, this paper, due in July 2018, will be the first step in the development of sorely needed international standards for managing climate risk.