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Actuarial body warns members of further climate regulation in insurance sector

Latest guidance from the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA), the international professional body for actuaries, have warned that “further formalised regulation” on climate change in the insurance sector is “increasingly likely” and that life actuaries need to be prepared in new guidance.

In the informal guidance, life insurance actuaries are told that they “should keep abreast” of “emerging regulatory standards that could affect their work”.

The guide sets out several practical steps that actuaries can take, such as using “qualitative scenarios”— for now – to begin to assess the future risks climate breakdown poses.

Actuaries are warned that it could be “problematic” to base their work “solely” on historic data or to fail to communicate the “limitations” of such an approach given the unique nature of climate risks.

The guide also details the increasing consideration of climate change by “many national and international regulatory and advisory bodies”, with the recent supervisory statement on the issue by the UK’s Prudential Regulation Authority (PRA) cited as an example.

Globally, it points to the work of the International Association of Insurance Supervisors (IAIS), a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions, which is currently examining risks to the insurance sector posed by climate change.

Members include the Dutch central bank, DNB, the US Federal Reserve, and the UK’s Financial Conduct Authority (FCA) and PRA.

In a speech yesterday, Frank Elderson, DNB’s Executive Director of Supervision, said that the IAIS will publish an “application paper” on climate-related risks next year, which will set out climate risks in the context of the global standards for insurance supervisors.

Both IAIS and the Sustainable Insurance Forum (SIF), another network of insurance supervisors and regulators, are observers to the Network for Greening the Financial System (NGFS), the central bank sustainability network.

Elderson was speaking at the 9th conference of Europe’s insurance and pension regulator EIOPA, whose recent opinion on integrating sustainability risk factors in Solvency II is mentioned by the IFoA as another example of the regulatory push on climate change.

IFoA states that if adopted, EIOPA’s proposals “would extend the existing requirements and senior management” by including “specific references to (and hence obligations regarding) sustainability or Environmental, Social and Governance considerations”.

The working group behind the guidance states its view that “with due consideration and commitment of resources, it is possible to at least undertake a qualitative scenario analysis given the current understanding of climate change risks”.

The Taskforce on Climate-related Financial Disclosures (TCFD) framework, a key component of which is scenario analysis, is cited as a resource in the guide.

In an op-ed for RI in the summer, the IFoA’s former chair of the Resource and Environment Board, Louise Pryor, described “robust scenario analysis” as a “vital tool in managing the transition to a low carbon economy for both governments and businesses”.

Since the IFoA took the unprecedented step in sending a climate risk alert to all its members in 2017, it has produced several guidance documents on the issue for actuaries working in different fields, including those advising UK trust-based defined benefit (DB) schemes and those working in defined contribution (DC) schemes.

David Ford, IFoA member“Recognising the implications of climate change risk in business operations is a key first step. Engaging internally with exercises such as scenario analysis, allowing for climate change effects in business planning, may provide greater insight into the specific risks a company faces,” said David Ford, IFoA member and one of the guide’s authors, in a blog.

“We encourage life actuaries to consider how the impacts and effects of climate change are applicable to their own work, and to their employer.”