Time insurers have a proper ESG framework in place

Come April 1 and every insurer will have in place a board approved Environmental, Social and Governance (ESG) framework as per the mandate given by IRDAI. The activities under ESG are to be monitored by the Board, which will also review the framework on an annual basis. In order to facilitate climate risk management, a comprehensive ‘Climate Risk Management (CRM) framework will be established by the board of insurer based on their size, nature and complexity of operations, states IRDAI. Insurers face the dual challenges of addressing escalating climate change risks and shifting industry regulations.

The escalating frequency and severity of extreme weather-related events—from wildfires in the US and record heat waves in Europe to floods in Japan—have shone a brighter regulatory spotlight on insurance risk and climate change. This was one factor that an ‘Insurance Regulator State of Climate Risks Survey’ was conducted by the Deloitte Center for Financial Services.A majority of US state insurance regulators expect all types of insurance companies’ climate change risks to increase over the medium to long term—including physical risks, liability risks, and transition risks.

More than half of the regulators surveyed also indicated that climate change was likely to have a high impact or an extremely high impact on coverage availability and underwriting assumptions. As the losses are mounting, insurers can no longer avoid or postpone addressing the impact of changing climate on their underwriting, pricing, and investment decisions, as well as their bottom lines.There’s no doubt that more information—through more effective disclosure—would help regulators assess the effectiveness of insurer actions to mitigate insurance risk due to climate change. And that could very well be the starting point of increased climate risk regulations.As rising climate-related losses threaten the viability of insurers’ books of businesses and investment portfolios, many regulators either aren’t aware of how prepared carriers are to deal with this threat or they aren’t fully confident that carriers are indeed prepared.

Still, the study reveals that one-third of the respondents said that they didn’t know how well the insurers are prepared to deal with the potential impacts of climate-related risks on financial stability.

Among those who were aware, only up to four respondents answered that insurers were largely or fully prepared. One-third of the regulators surveyed didnot know whether current insurer risk models were up to the challenge of capturing and testing climate-related risks.Clearly, there’s room for the insurers to better disclose and showcase the efficacy of any activities and actions they may be taking to assess and mitigate climate-related risks.

This could help reassure regulators about the insurers’ ability to withstand extreme weather events, defend underwriting and pricing decisions made in response and possibly head off more onerous mandatory disclosures down the road.At the same time, more may be asked of insurers in terms of steps taken to prevent worsening climate-related losses, including adaptation activities to mitigate the impact of such risks.