Navigating Emissions Reduction and Climate-Related Risk
Explore how actuaries can contribute to managing insurers’ climate-related risk around greenhouse gas emissions.
Our latest market update analyses the progress made to date by non-life insurers and the challenges they face in applying climate considerations across their business functions. Drawing upon insights from climate disclosures provided by non-life insurers and syndicates - representing 75% of the non-life insurance market - our analysis reveals that:
Climate ambition is driving progress in climate risk modelling
Leading insurers are integrating climate risk considerations throughout their business and beyond minimum regulatory requirements.
Insurers are developing a better understanding of climate risks
Many insurers have carried out initial quantitative climate modelling exercises (e.g. Bank of England’s 2021 Climate Biennial Exploratory Scenario), and are now using more sophisticated climate scenario techniques to further develop their understanding of the climate-related risks and opportunities.
Technical complexity and strategic considerations are inhibiting action
Most insurers have yet to take significant action based on their evaluation of climate risks and opportunities. The lack of established precedents, well-defined processes, and robust controls around climate modelling are hindering insurers from proactively addressing climate-related risks and opportunities.
In this update we assess the comparative maturity of climate considerations across non-life insurance functions, including: risk management, investments, underwriting, pricing, capital and reserving.
Regulation and ambition are driving climate considerations in core business functions
Climate change risk considerations are integrated to varying degrees across different business functions. Areas subject to regulatory requirements have progressed more quickly than those driven solely by corporate ambition. Some of these business functions are interlinked, and progress in one area can lead to progress in another.
We’ve mapped the maturity of climate risk consideration across business functions below:
- High maturity
- Medium maturity
- Low maturity
High maturity
Risk management, investments and scenario analysis
High maturity in these functions has been driven by longer standing guidance and regulation, e.g. the Task Force for Climate Related Financial Disclosure (TCFD)1 framework, FCA/PRA expectations and, more recently, Climate Biennial Exploratory Scenarios (CBES) and Partnership for Carbon Accounting Financials (PCAF).
Leading insurers are embracing quantitative measures
We have outlined leading practices for integrating climate risk in different insurance functions, which all currently have varying maturity levels. Is your firm following market leading practice in these functions? Take a look below to find out.
Integration of climate risk in risk management frameworks, scenario analysis and decision making
Climate risk is fully integrated into risk management frameworks and scenario analysis by all leading insurers, yet only 60% use it in decision-making, highlighting a gap between analysis, insight and action.
The four key questions below can help frame your thinking as you start to tackle climate risk within your own business.
How does your approach to climate risk and opportunities compare to that of the market?
What is the appropriate level of action to take on climate risk within each business function?
What challanges are inhibiting you from taking action on climate risk?
What additional resources do you need to take action on climate risk?
Please contact us if you would like to read the full report, which provides further insights on best practice and challenges in climate risk modelling, or have any questions on tackling climate risk in your business.
Related content
Follow us
