With Insurers on Edge, Regulators Begin to Act on Climate Risk

November 16, 2021

Bloomberg:

Insurers are getting increasingly worried about the perils of climate risk after a run of natural disasters, according to a report by BlackRock Inc.

The big majority of insurers now see climate as an investment risk and are positioning portfolios accordingly, Charles Hatami, Global Head of the Financial Institutions Group and Financial Markets Advisory at BlackRock said. For its survey, BlackRock spoke with 362 executives at insurance companies representing $27 trillion in investable assets across 26 markets.

As many as 95% of insurance executives who took part in study confirm that climate risk will have a major impact on how they build their portfolios over the next two years. 

While geopolitical risk remains the top concern for insurers, more than one in three respondents now see environmental concerns as a potential headwind, the survey showed. 

In long overdue response to this critical threat, the state of New York took first steps to give direction for insurers on climate change risk mitigation.

New York State Department of Financial Services:

Financial regulators across the globe are increasingly recognizing climate change as a threat to financial stability.  DFS is proud to be the first U.S. financial regulator to issue a holistic set of expectations on managing the financial risks from climate change.  As described in the guidance, DFS expects insurers to take a strategic approach to managing climate risks that considers both current and forward-looking risks and identifies actions required to manage those risks in a manner proportionate to the nature, scale, and complexity of insurers’ businesses.  Specifically, an insurer should: 

  • integrate the consideration of climate risks into its governance structure at the group or insurer entity level;  
  • when making business decisions, consider the current and forward-looking impact of climate-related factors on its business using time horizons that are appropriately tailored to the insurer, its activities, and the decisions being made;  
  • incorporate climate risks into the insurer’s existing financial risk management, including by embedding climate risks in its risk management framework and analyzing the impact of climate risks on existing risk factors;  
  • use scenario analysis to inform business strategies and risk assessment and identification; and  
  • disclose its climate risks and engage with the Task Force on Climate-related Financial Disclosures and other initiatives when developing its disclosure approaches. 

A clip from my interview with Andy Hoffman of the University of Michigan in part of the video above. Here’s a more complete piece of his statement on insurance. Money quote here is “..if you really want to change a company’s behavior, affect their cost of capital, and insurance companies are doing that.”

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