Gabriella Ben-Hutta
Editor at Coverager

Addressing climate change in the insurance sector

The Actuarial Society’s Climate Change Committee has embarked on a series of information notes to highlight the impact of climate change on the financial services sector, with a particular focus on insurers. This first installment reviews existing guidance and initiatives, and delves into how climate risks integrate with Enterprise Risk Management (ERM) frameworks.

Rising Significance of Climate Risks

The World Economic Forum’s (WEF) “Global Risks Report” consistently ranks climate change as a critical global risk. In 2024, “Extreme weather events” were highlighted as the most severe risk over a ten-year period, underlining the urgency for financial sectors to adapt.

Guidance and Initiatives

Several organizations have issued guidance to address climate change:

  • The Institute and Faculty of Actuaries (IFoA) emphasizes ethical responsibilities and unbiased consideration of climate impacts.
  • The Actuarial Society of South Africa (ASSA) has developed guidance and initiated the creation of a South African climate change index.
  • Regulatory bodies like the South African Reserve Bank have introduced stress tests and surveys to assess industry preparedness.

Globally, the International Financial Reporting Standards (IFRS) Foundation introduced IFRS S1 and IFRS S2 to unify sustainability and climate-related disclosures, enhancing transparency and comparability.

Integrating Climate Risks into ERM

Climate risks are categorized into physical, transition, and liability risks, affecting various business aspects such as operations, product development, and financial stability. The integration of these risks into ERM frameworks is essential, ensuring proportional governance, scenario analysis, and disclosure practices.

Risk Management Strategies

Insurers must:

  1. Understand climate-related risks and opportunities.
  2. Ensure informed decision-making related to core risks.
  3. Implement appropriate governance and risk management practices.

Impact on Business Elements

Climate-related risks impact:

  • Customer interactions.
  • Business continuity and operations.
  • Product development.
  • Regulatory compliance.
  • Financial stability and profitability.

Conclusion

Climate change poses unique challenges, but existing ERM frameworks can be adapted to address these risks effectively. Collaboration with climate experts and leveraging available resources are key to refining these frameworks. The next installment will explore climate-related disclosures in greater detail.

By proactively managing climate risks, insurers can better navigate the complexities of a changing environment, ensuring resilience and sustainability for the future.