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A.M. BEST'S MONTHLY INSURANCE MAGAZINE


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Regulatory/Law
Global Threat

International organizations call for action to focus on emerging risks, including addressing climate-related issues.
  • Howard Mills
  • October 2018
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By Howard Mills

By Howard Mills

The public stance by global supervisors [regarding climate change] may mean that insurers everywhere need to take heed and start planning.

In the movie Patton, the U.S. Third Army is in danger of stalling during the Battle of the Bulge because of bad weather. Gen. George S. Patton (played by George C. Scott) instructs:“We're gonna keep fighting. Is that clear? We're gonna attack all night, we're gonna attack tomorrow morning. If we are not victorious, let no man come back alive!”

If you don't know from history class or haven't seen the movie, Patton had 250,000 prayer cards printed for his men, and ordered them to pray for relief from the heavy rains. It worked, proving that action at the top may be the only way to successfully address weather's impact.

Insurance regulators may have the same thought. At the recent meeting of the International Association of Insurance Supervisors (IAIS), leaders said they were about to develop a new strategic plan. That strategic plan focuses on emerging risks, and among those is the risk of climate change.

This was reinforced during the meeting when the IAIS released its Issues Paper on Climate Change Risks to the Insurance Sector. The paper noted that, “Climate change is recognized … as a top global threat. …In recent years, there has been increasing recognition at the international level that climate change will also affect the financial system, including insurers.”

The IAIS cited numerous examples of climate risk across insurance business, strategy, and operations, including underwriting risk, market risk, investment risk, strategic risk, operational risk, and reputational risk. Not surprisingly then, the IAIS said that climate change is a material prudential issue for the financial sector.

Anecdotal evidence indicates that reinsurers and some European insurers have been among those most publicly developing responses to climate change, but this new public stance by global supervisors may mean that insurers everywhere need to take heed and start planning. The IAIS paper says that while some insurers are not actively seeking to enhance their resilience to climate change, it is imperative that all insurers consider their exposure to climate risk and seek to build resilience to such risks where appropriate. In the United States, California's Climate Risk Carbon Initiative may be one harbinger of change.

The issues paper refers to the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (FSB TCFD). These recommendations begin with governance disclosure, calling for insurers to describe the board's oversight of climate-related risks and opportunities, and to describe management's role in assessing and managing climate-related risk and opportunity.

According to the TCFD, organizations should consider both the processes and frequency by which boards and/or board committees are informed about climate-related issues; whether they consider these issues in just about all the decisions they make; and how the board monitors and oversees progress against goals and targets for addressing climate-related issues.

As the IAIS noted, active board involvement may be new for some insurers, but if the impact of climate change on insurers proves to be as significant as the regulators project, boards need to take the reins and guide the enterprise while there is time to adapt. As General Patton knew, when it comes to the weather, only action from the very top will do.

 

Best’s Review columnist Howard Mills is global insurance regulatory leader at Deloitte LLP and a former superintendent of the New York Insurance Department. He may be reached at howmills@deloitte.com.


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