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The Evolution of Insurers’ Climate-Related Reporting in the US

Though these disclosures are meant to provide an overview of an insurer’s climate-management practices and are not judged by length, the limited content analysis in some findings highlights the need for more substance on the part of insurers.

The insurance industry has been assessing and underwriting weather-related risks since the early days of its inception, and climate change has added a layer of complexity to this analysis. In addition to physical risks impacting claims, climate change can also affect the value of investments as the economy transitions away from fossil fuels and implements climate-change mitigation. The Deloitte Center for Sustainable Progress estimates the costs of climate change could reach $178 trillion by 2070 and that decarbonization could net $43 trillion over 50 years.

Actuaries are key in helping insurance companies recognize these risks and identify approaches to moderate their impact. Disclosures are one of the tools actuaries use for assessment — with the framework developed by the Task Force for Climate-related Financial Disclosures (TCFD) as the most commonly used, internationally.

For reporting year 2021, the National Association of Insurance Commissioners (NAIC) announced a new standard for climate-risk disclosures that aligns with TCFD benchmarks — allowing insurers to fulfill disclosure requirements by either submitting an NAIC Climate Risk Disclosure or a TCFD report.

A review of reporting

According to the Society of Actuaries (SOA) Research Institute report, Analysis of US Insurance Industry Climate Risk Financial Disclosures, there were 446 unique filings for reporting year 2021 — the first year that insurers could use the NAIC’s TCFD-aligned survey structure. The number of unique filings per business line is listed below:

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    Property & Casualty (P&C): 242

  • Life: 112

  • Health: 72

  • Other: 20

The filings illustrate the variety of approaches. Some consist of a broad discussion of how climate change affects various aspects of the insurer’s business. Others focus on a single area — such as underwriting-related risks — while neglecting other relevant areas, such as investment-related risks. Furthermore, some insurers have sophisticated governance and management processes for addressing climate risks — while others have less robust approaches. Though some insurers assert that climate change does not affect their business model, the strength of their supporting arguments varies considerably.

The chart below highlights some high-level observations from an analysis of a stratified random sample of 16 filings each from health, life and P&C lines of business:

Analysis of the answers to the NAIC’s list of voluntary yes/no questions, which reveal the presence or absence of TCFD disclosure features, finds that 55 percent of life insurers and P&C insurers have publicly disclosed at least one climate-related goal. However, only 36 percent of health insurers disclose at least one climate goal. Furthermore, 91 percent of disclosures in the analyzed sample reported having a Board member(s) or committee tasked with overseeing the management of climate-related financial risks.

Analyzing climate risks in investment portfolios

The SOA Research Institute also surveyed insurers and asset managers in the US to analyze the assessment tools and metrics they use to measure climate risk in their investment portfolios and how they disclose the results. The survey found that most US insurance companies do not have a formalized method to manage climate risk in their portfolios. On the other hand, nearly all are committed to aligning their portfolios with carbon footprint reduction.

Surveyed companies that do track climate risk all reported disclosing their findings with internal stakeholders, such as Boards and risk and investment committees. Many also disclose findings publicly through their annual reports. About half of those surveyed reported using the TCFD framework.

Those that do not yet disclose climate-risk metrics are in the beginning stages of measuring them and expressed the intention to make their metrics public once their models are mature.

Companies surveyed agreed there was a need for standardized risk disclosures for investment portfolios in the US and globally. Several have reached out to the US Security and Exchange Commission advocating for this — stating that the lack of high-quality climate-related information hinders the efficient allocation of capital that can generate strong, long-term financial returns.

The actuarial role in the evolution of an organization’s climate-related

disclosures

The SOA report, TCFD: What Actuaries Need to Know, outlines touchpoints on how actuaries can apply their training and experience to the development of climate-related assessments. Some of these activities include:

  • Identification, assessment and management of climate risks. Actuaries across practice areas have experience working with a range of risks, which can be impacted by climate change.

  • Scenario analysis. Actuaries can facilitate understanding of their organization’s underwriting and investment risks and explain their potential impact.

  • Preparation of parts of climate-related reporting. Actuaries can explain key elements of the reporting to their organizations and help make sure final reports are accurate, meaningful and valuable.

  • Identification of organizational climate impacts at the enterprise level. Actuaries can communicate the big picture of the risks associated with extreme climate events.

Considerations for the future

The analysis of 2021 NAIC climate-risk disclosures reveals wide variation due to each company’s unique exposure to climate risk.

Though these disclosures are meant to provide state regulators with an overview of an insurer’s climate-management practices and are not judged by the length of their filings, the limited content analysis in some findings highlights the need for more substance on the part of insurers. For example, nearly 40 percent of disclosures are less than two single-spaced pages.

Additionally, many of the disclosures focus on one side of the balance sheet and neglect the other. P&C insurers often focus on underwriting risks while life insurers zero in on investments. The most comprehensive disclosures, however, focus on both.

Reviewing examples and publicly available disclosures of other insurers could help companies assess their practices.

Visit the SOA Research Institute’s Catastrophe and Climate webpage for the latest resources on assessing and managing climate risk’s impact.

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