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:
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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R. Dale Hall, FSA, MAAA, CERA is managing director of the Society of Actuaries Research Institute.
Published Dec 14, 2023 11am EST / 8am PST / 4pm GMT / 5pm CET