Turning up the heat - climate risk assessment in the insurance sector

Climate risks are recognised as a critical threat to society, with potentially adverse implications for financial stability and the viability of insurers. Efforts have been made by insurance supervisors and insurers in some jurisdictions to better understand climate risks, but further efforts are needed. To facilitate a better understanding in this area, this paper examines the different regulatory approaches currently in place relating to climate risk assessment, in particular through enterprise risk management frameworks. The paper also describes how some supervisory authorities have undertaken climate risk assessment exercises, focusing on stress test and scenario analysis approaches. In general, the paper finds that risk quantification techniques and models that consider climate risks are more advanced for physical risks, but are still at an early stage for transition and liability risks. Looking ahead, there is room to enhance international cooperation among insurance supervisors, and within financial policy and regulatory forums to improve understanding of climate risks and their potential impact on firms, policyholders and financial stability. Other key policy issues that require consideration include the impacts of climate risks on access and affordability of insurance products, and the potential use of capital requirements to address climate risks.

JEL classification:  D62, E58, E61, F42, G11, G18, G20, G22, G28, G32, Q28, Q54