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IAIS Warns Insurers of Exposure to Climate Risks

More than 35% of insurers’ investment assets are exposed to climate risks, association warns.

The International Association of Insurance Supervisors (IAIS) has warned that insurers will need to manage their investment exposures to assets and sectors most vulnerable to physical and transition risks, as climate change continues to cause more extreme and frequent weather-related events.

In a special topic edition of its Global Insurance Market Report (GIMAR), the IAIS provides an analysis of insurers’ investment exposures to and supervisors’ views on climate-related risks, drawing on quantitative and qualitative data gathered from 32 member institutions – which together cover 75% of the global insurance industry.

The IAIS estimates that “climate-relevant” assets – within equities, corporate bonds, loans, mortgages, sovereign bonds and real estate – represent more than 35% of insurers’ total assets.

The data from IAIS members was used to carry out scenario analysis to assess future climate change impacts for the insurance sector. The results point to a need to pursue an “orderly transition” towards internationally agreed climate targets to minimise the risks to solvency and financial stability, the IAIS said.

Compared to an orderly transition, a disorderly transition (a scenario where climate targets are not met) would have a greater adverse effect on the insurance sector’s solvency by a magnitude of two to six times, the IAIS says.

“Under an orderly transition scenario, results show a drop in insurers’ available capital of around 7% to 8% of their required capital; that drop increases to over 14% under a disorderly transition scenario, and to almost 50% under a ‘too little, too late’ scenario,” the IAIS says.

Nevertheless, the IAIS found that the global insurance sector as a whole is likely able to absorb investment losses from all the scenarios tested, in light of its high pre-stress capital levels.

The IAIS acknowledges several conceptual and methodological challenges it experienced in its analysis, including uncertainty regarding the process of climate change and its nonlinear effects, the forces influencing it and how these relate to financial sectors, and the lack of a globally consistent framework for measuring climate risk-related financial information.

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