Coordinated, strategic approach needed by insurers, as supervisors step up efforts for consistent oversight of climate risk management.
Insurance firms must manage climate risks holistically across their underwriting and investment activities, according to Tom Tayler, Senior Manager at Aviva Investors’ Sustainable Finance Centre for Excellence, who also called for a more coordinated approach from regulators.
“There is something disconnected if you are starting to remove or underweight investment in certain sectors and yet you continue to underwrite those same sectors,” he said, noting that some insurers are still underwriting risks for coal firms and their customers while reducing or exiting investments in the sector.
Tayler was speaking at a webinar held by the International Association of Insurance Supervisors (IAIS) and the UN-convened Sustainable Insurance Forum (SIF) to highlight a new application paper which provides guidance to insurance regulators and supervisors on how to monitor and assess climate-related risks in the sector, with reference to the existing framework of Insurance Core Principles (ICPs).
“Like the pandemic, the climate crisis is a systemic interconnected risk. It doesn’t make sense to approach it in a fragmented way, looking at investment over here, with a different set of people thinking differently about underwriting over here. The holistic approach is absolutely essential,” said Tayler, who has been seconded to the COP26 High Level Climate Champions’ Finance Team since February. “It’s all risk management at the end of the day, whether that’s investment or underwriting or business risk.”
A number of insurance firms have come under pressure recently to withdraw from the coal industry, both as investors and underwriters. In May, AIG, Lloyd’s of London and Tokio Marine were the targets of protests, while UN Secretary General Antonio Guterres told the Insurance Development Forum Summit, “We need net-zero commitments to cover your underwriting portfolios.”
Several large firms have announced moves out of coal. Next month, Germany’s Allianz introduces a new underwriting policy which excludes utilities which generate at least 25% of their electricity from coal or operate at least five gigawatts of installed coal-fired generating capacity. Aviva’s net-zero 2040 plan includes a commitment to stop underwriting insurance for firms making more than 5% of revenue from coal by the end of 2021, divesting all such firms by the end of 2022, unless they sign up to the Science Based Targets initiative.
Tayler praised the IAIS/SIF application paper for recognising the relevance of ‘double materiality’ to how insurers manage climate-related risks in their investment strategies, meaning firms need to consider the real-world impact of investment decisions. “If we lose control of global temperatures and cross the tipping points to 4-6 degrees of warming, insurance underwriting models don’t work, especially in relation to physical risk. That’s why it’s important to address the question of double materiality,” said Tayler.
The IAIS/SIF application paper’s section on investments notes that insurers may apply engagement strategies to “influence the strategy and business of the firms in which they are investing to progress towards sustainable economic activities, and contribute to reducing climate-change related risks”. The paper says these activities may include exercising voting rights, sending letters, holding meetings and other forms of escalation if objectives are not achieved.
“It’s very welcome to see reference to the impacts of – as well as the risks to – investments in the application paper and also to the important role of stewardship, in terms of engaging with the businesses in which we invest and the businesses which we are underwriting, ensuring that they are engaging with the transition so that their business has a role to play in a net zero economy,” said Tayler.
The paper is intended to provide guidance to the IAIS’s 150-plus member organisations globally to ensure a consistent approach to supervision of insurers’ climate-related risk management and disclosures, relating to how they handle physical, transition and liability risks across their operations.
Tayler said the paper was a positive step, noting also convergence around the disclosure recommendations of the Task Force on Climate-related Disclosures. He also suggested the systemic risks posed by climate change – and the role played by financial institutions in tackling them – required greater coordination across finance sectors, including updated mandates from government where necessary.
“It’s great that the IASA is seeking to coordinate through the application paper the role of supervisors so there is a consistent approach across jurisdictions. There’s an argument that we need coordination of the different groups of supervisors and multilateral bodies that oversee the financial architecture to create a clear and smooth transition plan so that we can all move together.”