How scrutiny affected the insurance sector’s climate-risk disclosures

The insurance sector performed poorly, despite the potential impact to the sector’s core business from climate-related risks.

Over the last 12 months, insurers have faced greater scrutiny and pressure from both shareholders and media to disclose and address the risks from climate change. Despite this and the potential impact to the insurance sector’s core business from the physical risks of climate change, the sector performed lower than the overall average in terms of the quality and coverage of climate-related risk disclosures. The coverage and quality metrics scores were received by each of the insurers reviewed on the basis of how they addressed or implemented all of the 11 recommendations by the Task Force on Climate-related Financial Disclosures (TCFD).

The insurance sector also continued to lag behind other key sectors, including banking (financial sector) and energy and transport (nonfinancial sectors). The decrease in the overall score of the insurance sector this year could be explained by new entrants, because when the score was compared on a like-for-like basis, the overall score of the insurance sector was found to have increased by 4%.

Below are some of the highlights from the sector:

• Insurance companies from Australia, Canada, Germany, Japan and the US were the leading performers in terms of quality of disclosures, scoring between 50% and 60%. They are followed by France, Philippines, South Africa and the UK. 
• Insurance companies from Colombia, India, Kazakhstan, New Zealand, Russia, Saudi Arabia and the UAE were among the worst performers, scoring below 10% for the quality of their disclosures. 
• Insurers who received the highest scores for quality tended to have separate climate-risk reports or webpages and were signatories to the TCFD recommendations. Close to half of the assessed insurers submitted Carbon Disclosure Project (CDP) responses. 
• The United Nations Environment Programme Finance Initiative (UNEP FI) was referenced by several insurers as a guidance tool for reporting against the TCFD recommendations.  
• Physical risks disclosures were more commonly referenced than in other sectors, which is not surprising because of their materiality to the insurance sector. However, these disclosures generally provided very little detail into how the risks were monitored and managed. Therefore, there is room for further improvement, particularly in consideration of the significant financial losses from the extreme weather events over the recent years.

We examined how the insurance sector performed against the four areas, through which the TCFD recommendations are structured.

Governance

Fifty-three percent of insurance companies included governance disclosures — a decrease of 8% when compared with 2018. Insurers with higher-quality governance disclosures were those with sustainability, social and ethical committees that reported to the CEO or the board on a frequent basis. Some insurers also had investment committees established to ensure that the funds invested in by the entity also considered climate risk. The details of governance structures were most frequently documented within the CDP responses and annual reports.

Top-performing insurers established internal programs to raise awareness among the board members, and build internal capability to address climate risks and opportunities across key responsibilities at the executive management level. Also, cross-functional climate change working groups were established to implement climate change action plans.

Strategy

Strategy disclosures were the most poorly developed of the four TCFD components, scoring 21% for quality. This was mainly because of the lack of disclosure relating to the results of scenario analysis and identified risk impacts. Insurers who carried out a scenario analysis tended to focus on the physical risks more than the transitional risks. Also, most did not disclose the results of scenario analysis, including the financial impact or statements on the resilience of the insurer’s strategy.

The increasing number of extreme weather events was the most common climate-related impact identified by the insurance sector. This was viewed as both a financial risk (because of higher payout levels and premium increases) and an opportunity (because of growth in demand for insurance and reinsurance products). Some insurers also identified transition risks that could impact their investment portfolio because of the changing demand for products and services (i.e., in the transition to low-carbon economy) and increasing greenhouse gas (GHG) emissions regulation. Reputational and liability risks were not frequently mentioned, although an insurers’ behavior after natural disasters did gain negative publicity.   

Companies within the insurance sector frequently performed scenario analysis and stress testing to better understand their risk profile. Scenario analysis was also mentioned more frequently by top-performing insurers when compared with other sectors, as this is already conducted to some degree to set insurance premiums. However, limited information existed on the modeled climate scenarios and their impacts. The methodologies of some of the analyses appeared to be based on historical trends, which omit the impacts of climate change. Also, in some cases the analysis was limited to investment portfolios and not insurance products.

High-performing insurance companies reported that they would commence scenario analysis in the coming year. Some insurers focused their strategic disclosures on the management of Scope 1 and 2 GHG emissions and becoming carbon neutral, although direct emissions are not seen as the key risk for companies in the sector. In the UK market, it is likely the insurance sector will see an increase in the strategy score because of the 2019 guidance issued by the Prudential Regulation Authority for the UK insurance industry.

Risk management

For the insurance sector, the risk management disclosures were 10 points lower for both coverage and quality scores when compared with the banking sector. Despite this difference, the risk management disclosures, together with the metrics and targets, was the highest scorer in the sector.

Most risk management disclosures discussed how climate change fits within the enterprise-wide risk management frameworks. Those with higher-quality disclosures have specific climate committees to oversee the management of physical risks on insurance products — and to manage changing premiums and product offerings.

Where insurers discussed the management of transition risks to their investment portfolios or the management of their own emissions, these issues were generally handled by separate groups at the operational level. Several insurers disclosed an explicit withdrawal of support for the fossil fuel sector. Despite disclosure of physical risks improving when compared with the previous year, only a limited number of insurers disclosed how they planned to manage physical risks, leaving much room for improvement.

Targets and metrics

A limited number of insurers set robust targets and metrics for climate risks that were aligned to physical and transition risks.

The TCFD Annex report recommends that insurers should also provide metrics and targets relating to aggregated risk exposure for weather-related catastrophes. Scope 1 and 2 GHG emissions were commonly disclosed by the insurers; however, the majority of the insurers did not disclose whether they monitored the carbon intensity of their underwriting or investment portfolios. Scope 3 emissions, targets and historical trend disclosures were rarely revealed. Where targets were disclosed, they related back to Scope 1 and 2 GHG emissions. There was no disclosure of targets and metrics specifically addressing physical risks.

The lower coverage and quality scores for metrics and targets was recognized by top-performing insurance companies with the development of metrics and targets commonly listed as an action item in their climate change action plan.