Global insurance supervisors cast doubt on “purely voluntary” TCFD but see benefits of “shared view” on climate scenarios

International Association of Insurance Supervisors releases draft paper with UN’s Sustainable Insurance Forum

Global insurance supervisors have cast doubt on the effectiveness of a “purely voluntary” approach to the Task Force on Climate-related Disclosures (TCFD), saying it “may not yield disclosures of the quality and scope” needed.

But they see possible benefits for regulators to come to a “shared view” on the parameters underlying scenario analysis, a key part of the TCFD.

The remarks come in a new draft paper by the International Association of Insurance Supervisors, a 215-member umbrella body hosted by the Bank for International Settlements.

“There may be benefits in coming to a shared view on the core parameters"

The document was prepared by the Sustainable Insurance Forum, the group convened by the United Nations Environment Programme (UNEP), in consultation with IAIS Members. 

The paper draws on the results of a SIF Survey that was conducted during the first half of 2019; it also draws on input from a workshop in September.

It found a “wide dispersion on climate-related disclosure between insurers”.

It continues: “Given this wide dispersion, a purely voluntary pathway towards adoption of TCFD Recommendations may not yield disclosures of the quality and scope necessary to inform decisions by insurers (as users of this information), as well as to disclosures by insurers (as producers of information) that are of the quality necessary to enable market participants and other users of information to make decisions about how insurers are taking action on climate risks and opportunities.”

The paper, which is out to consultation until February 5, notes that during 2019 some supervisors and governments – including in the UK and France – have expressed that climate risk disclosure may need to become mandatory in order for climate-related risks to be effectively priced within the financial system.

The survey found that while a “vast majority” of insurers do expect that climate change will affect their business, awareness and understanding of the TCFD Recommendations “remain comparatively low”. 

And “only a small number” are already taking steps to implement the TCFD Recommendations and to deliver TCFD aligned disclosures. 

It added that some SIF members have implemented requirements for disclosure of climate-related information by insurers.

For example, the California Department of Insurance and the Washington State Office of the Insurance Commissioner are working with other state-level regulators to reference the TCFD Recommendations within the National Association of Insurance Commissioners (NAIC) Climate Risk Disclosure Survey – a mandatory instrument in several states.

Outgoing Bank of England Governor Mark Carney, a driving force in the creation of the TCFD, said in June that, “to achieve a carbon-neutral economy, disclosure must become mandatory”.

“Divergent perspectives”

One of the main elements to come out of the TCFD is climate scenario analysis and the report notes there are “divergent perspectives” on how supervisors can best engage with industry to “encourage the development of robust approaches” to it.

“Some industry stakeholders have expressed that standardisation of aspects of TCFD-related activities – for instance, the development of common scenarios – may constrain the internal benefits that an insurer may accrue by undertaking some processes independently. 

“However, there may be benefits for supervisors in coming to a shared view on the core parameters underlying different scenario analysis steps – such as clear expectations and guidance on how to consider climate risk impacts across different types of financial assets (e.g. equity, debt and real estate) in order to promote comparability of results. 

“In addition, finding ways to harmonise the view of climate sensitivity of a given level of greenhouse gas (GHG) emissions, or the impacts associated with a given level of temperature rise, could help alleviate some aspects of uncertainty. Consideration of the veracity of the scenarios and the associated impacts will be needed, since the results could influence product pricing and availability.”

The new consultation follows a joint Issues Paper on Climate Change Risks to the Insurance Sector last year by the SIF and IAIS.

The IAIS was established in 1994 as a voluntary membership organization of insurance supervisors and regulators, “constituting 97% of the world's insurance premiums”.