Insurer Update
As it becomes more and more key for stakeholders, we look at how insurers have developed their climate change reporting in the past 12 months. Given this, what should mid-sized insurers be thinking about for their upcoming year end in this area?
Climate change and ESG related reporting could well be the main financial reporting development of recent times. It will be increasingly important as users of financial information place more emphasis on organisations’ consideration of these factors.
What are the latest regulatory developments?
Most mid-sized UK insurers will still be swapping notes with their peers as to how they intend to build on their approach to meeting the Prudential Regulation Authority’s (PRA) supervisory expectations issued in 2019. Whilst SS3/19 still represents the primary framework for most non-listed UK insurers, developments during 2022 may point to how this framework will evolve.
A new body, the International Sustainability Standards Board (ISSB), has been created to sit alongside the International Accounting Standards Board under the International Financial Reporting Standards (IFRS) Foundation.
In March this year, the ISSB published for comment proposals for general sustainability-related disclosure requirements and climate-related disclosure requirements. The UK Government’s Roadmap to Sustainable Investing published in 2021 stated that the ISSB’s standards will form the backbone of the UK’s sustainability disclosure requirements in the future.
The FCA plans to work with the Financial Reporting Council (FRC), and others including the PRA, to set up an appropriate way of overseeing and enforcing disclosures against these new standards. It’s unclear how these new standards will impact smaller insurers reporting under UKGAAP, but all insurers will need to keep an eye on developments in this space.
The PRA has also been busy publishing the results of its Climate Biennial Exploratory Scenario exercise (CBES). Its aim is to examine climate-related financial risks that might arise over a timescale of 30 years or more and assess the industry’s resilience to those risks.
Although the results show that losses for both life and general insurers appear manageable under the scenarios modelled, the PRA makes it clear that this is only the beginning of its work. It says insurers must continue to develop more advanced methods to identify, measure and manage climate risks. We are already seeing their supervisory influence in action in this area.
What has changed in the last 12 months?
Governance changes
Looking at publicly available information, it’s clear that the UK’s largest insurers continue to develop their governance structures to place greater emphasis on climate change and broader sustainability factors. More organisations have set up board sustainability committees or their equivalent. Many are also creating more dedicated executive roles, such as the Chief Sustainability Officer.
But we aren’t seeing the same trend for medium sized insurers. Taking into account proportionality, it makes sense that current governance processes (where climate change oversight is embedded in the current governance structure) are not changing, with many viewing them as already fit for purpose given supervisory expectations.
Reporting trends
The UK’s largest insurers have continued to evolve their public reporting, with more granular detail on risk management and scenario analysis.
For medium sized insurers, external reporting is not changing drastically. The most common approach is concise disclosure structured around the TCFD framework. We generally see climate risk scenarios continue to be assessed qualitatively, with limited disclosure in the annual report or SFCR of how any impact on liabilities would be managed. We know medium sized insurers have been focusing on their investment portfolios to meet the COP26 agenda and we expect this to continue to be their key priority.
Reserving trends
For the general insurance sector (specifically household and commercial exposures) there seems to have been little explicit allowance in key assumptions, such as inflation or rates, to reflect higher claims cost from exposure to climate risk. Few doubt the UK will face increased risk from climate change-related dangers such as floods and wildfires. Until now there’s been little consideration of wildfire risk in the UK, but we expect this to change following the summer’s extreme heatwave.
Amongst our life and health insurer client base, we have seen minimal impact from climate change factors, which reflects the lack of industry-level data currently available as to any impacts on mortality and morbidity.
What should mid-sized insurers focus on for the 2022 year end?
Regulators and other stakeholders recognise that climate change related disclosure is still a relatively new area. This likely explains why the level of feedback for medium sized insurers has been limited. We therefore wouldn’t expect insurers to make sweeping changes to their existing 2021 external reporting, but this is not to say they shouldn’t continue to make improvements.
One of the PRA’s conclusions from its CBES is that many firms lack the resources for climate risk modelling and data analysis. Some insurers may only be able to close any data gaps once industry-wide studies are available. But others, with shorter tail exposures, will be expected to model impacts more readily.
Everyone knows it’s a challenge for modellers to quantify climate change risk financially, using limited past claims data. Perhaps claims experience has been gradually reflecting climate risk but, as this risk is ever-changing, standard actuarial methods that rely on stable claims development won’t be suitable for reserving purposes.
We would recommend that all insurers, as part of their 2022 public reporting, acknowledge the findings of the CBES. They should explain what actions they’re taking in relation to any data and modelling gaps they’ve identified. Alternatively, they could explain why they’re not yet able to take any action.
If you would like further guidance on the issues raised in this article, please contact Pauline Khong or Martin Watson.
