CLIMATE CHANGE IN THE 2020s: FEBRUARY 2020
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CLIMATE CHANGE
IN THE 2020s:
THE DECADE FOR
INSURERS TO LEAD
FEBRUARY 2020
CLIMATE CHANGE IN THE 2020s:
THE DECADE FOR INSURERS TO LEAD
Climate change is at the top of the agenda for policy makers,
regulators and globally significant companies. It is an unprecedented
risk and is under increasing scrutiny by shareholders and regulators.
For insurers, climate change also presents opportunities for the
industry to do what it does best – assessing and providing protection
against risk – both in managing their own business and providing
innovative products for policyholders to protect them against some of
the economic implications. The 2020s will be a decisive decade in the
race to deal with climate change and insurers may well play a key role
in deciding the outcome of these efforts.
Climate change risks property and flood insurance policies,
for insurers among others. It is also likely to result in
an increase in demand for protection from
Climate change affects insurers on both
adverse climate events.
sides of their balance sheet, disrupting
insurers’ assets as well as their liabilities
Climate change is also universal, with its
under the policies they write. Given the
effects felt globally, not just in wealthy
wide range of climate change risks,
areas with high insurance penetration.
many regulators and industry bodies
Climate risks lay bare the insurance
have adopted the helpful classification of
protection gap in developing countries
the types of climate risks coined by the
where the effects of natural catastrophe is
Governor of the Bank of England,
likely to be significant, whilst not having
Mark Carney2:
the benefit of comprehensive insurance
• Physical risks, the impact of the climate protection. Innovative forms of alternative
on physical assets which may lead to risk transfer, through for example
impairment of insurers’ assets and/or parametric (re)insurance and insurance-
the property which they underwrite. linked securities (ILS) would be ideally
placed to offer the protection so badly
• Transition risks, the risk in moving (and
needed by the most vulnerable.
being required to move by laws,
regulations and policy decisions) from
On the life insurance side, health and life
the “brown” where we are now,
insurers may also be impacted by
towards the “green” world by adapting
changes in life expectancy and mortality,
to the changing climate and seeking to
lifestyles and a shifting geographical
stop further damage.
spread of vector-borne diseases,
• Liability risks, the risk of increased alongside the effect on the assets
liability resulting from litigation on backing these liabilities.
climate change issues.
Assets
Liabilities On the asset side, climate change may
On the liability side, climate change will affect the value of investments,
clearly have an impact on policies particularly in ‘brown’ industries, i.e.
underwritten by general insurers. An industries which have the most negative
increase in severe weather conditions environmental and climate impact such
will lead to an increase in claims under as fossil fuel extraction and high carbon
1 Source: NDC Global Outlook Report 2019
(https://www.undp.org/content/undp/en/home/librarypage/environment-energy/climate_change/ndc-global-
outlook-report-2019.html)
2 Source: Carney, M. (2015). Breaking the Tragedy of the Horizon
(https://www.bankofengland.co.uk/speech/2015/breaking-thetragedy-of-the-horizon-climate-change-and-
financial-stability)
2 CLIFFORD CHANCE
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEAD
emission transport companies. At the to monitor and scan the horizon for future
same time, new investment opportunities developments in order to ensure they do
arise from these changes. Alternative not set themselves up to inadvertently fall
asset classes, such as green bonds, foul of regulations.
green funds and environmental, social
and governance (ESG) focused We focus here on some key initiatives
investments will continue to grow and will relevant to insurers (with a focus on
need to feature more prominently within the UK):
insurers’ portfolios in response to climate
International Association of Insurance
change. Indeed, as we discuss below,
Supervisors (IAIS)
rules, regulations and to some extent
The IAIS has been working with the
voluntary initiatives, such as the Task
Sustainable Insurance Forum and
Force on Climate-related Financial
insurance regulators globally in responding
Disclosures (TCFD), and consumer
to climate risks. Initiatives on climate
pressures will drive insurers to make
change in many jurisdictions are being
green investment decisions and ensure
developed and the IAIS is keenly aware of
they have ESG compliant investment
the need for insurance supervisors to give
strategies. These are issues which all
climate change their full attention and that
industries will be grappling with, but
supervisory requirements will need to be
insurers with their expertise in risk
scaled up. As an indication, the focus of
assessment should be ideally placed to
this year’s IAIS annual conference will be
leverage this liability side expertise to
climate change.
manage their asset portfolios.
In addition, the IAIS has noted the impact
Legislative and regulatory of climate change and the insurance
initiatives protection gap and the role that
There is an increasing awareness of the parametric/ index linked (re)insurance
urgency to address the challenges of could play to plug the gap. An example of
climate change. Policymakers at this is the $225 million ILS issuance by
international and national levels are the government of The Philippines in
working on imposing laws and November 2019 seeking to close the
regulations to ensure insurers consider country’s gap in protection against
climate change risks in their business. A earthquakes and tropical cyclones.
complicated web of climate risk
governance, risk management, The IAIS has also focused on disclosure
stewardship and disclosure requirements requirements and is supportive of insurers
is beginning to emerge globally, but complying with the TCFD
particularly in the European Union and Recommendations. It has found that
the UK.3 whilst insurers (particularly in the general
insurance sector) show good awareness
In addition to focusing on climate change of climate risks, progress in complying
simply because it is the right thing to do, with TCFD disclosure standards has been
insurers will also need to monitor legal and slow for insurers especially compared to
regulatory requirements as they begin to banks and other financial institutions.4
apply to them. In addition, decisions Whilst the TCFD Recommendations are
insurers make now (for example their voluntary, in the IAIS’ view, climate risk
investment strategies) are likely to have disclosure could be assumed to already
long term consequences, whilst climate be required under the IAIS’ Insurance
change regulations are only now beginning Core Principle 20 (Public Disclosure)
to be formed. Therefore, insurers will need which requires firms to disclose “relevant
3 We refer to our Thought Leadership page on climate, sustainability, green finance and renewables which sets
out a broader summary of the various initiatives on climate change and our publication Growing the Green
Economy which is a collection of articles focusing on sustainability issues globally but with a particular EU
and UK focus
4 See IAIS Issues Paper on the Implementation of the Recommendations of the Task Force on Climate-related
Financial Disclosures, 19 December 2019.
CLIFFORD CHANCE 3
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEAD
and comprehensive information on a Senior Management Function. Whilst one
timely basis in order to give policyholders individual will have responsibility, insurers
and market participants a clear view on will need to ensure that taking climate
their business activities”. This view is also change risks and ESG matters into
taken by the Financial Stability Institute account must form part of the overall
and a majority of insurance regulators, culture of the firm.
including the PRA.5 The IAIS now aims to
publish an Application Paper on climate The PRA also expects firms to manage
risks in collaboration with the Sustainable climate risks within their existing risk
Insurance Forum later in 2020 to assist management framework and firms will
insurance regulators in developing their need to demonstrate that they understand
regulatory frameworks in respect of the resulting financial risks and how their
climate risk disclosure. business models will be affected.
European Insurance and Occupational In addition it has started working with
Pensions Authority (EIOPA) firms on in-depth scenario and stress
On the back of the EU’s Sustainable testing on climate change to identify the
Finance Action Plan (SFAP)6, EIOPA has risks so as to inform firms’ decisions.
published its proposals on how Similar to the EIOPA proposals, the PRA
sustainability risks should be included expects firms to consider financial
within the Solvency II framework. In climate change risks in their ICAAP or
particular, it has proposed that ORSA assessments under the Prudent
sustainability risks will expressly need to Person Principle. The Bank of England
be taken into account in the Prudent has also announced that it will focus on
Person Principle, risk management and financial risks resulting from climate
solvency capital requirements. EIOPA is change in its 2021 biennial exploratory
also encouraging insurers to use scenario to test the resilience of financial
qualitative scenario analysis and testing to institutions, including insurers, to
examine the impact of climate change, climate risks.
with scenarios tailored to the insurer’s risk
profile. These proposals echo the UK Insurers are also expected to consider
PRA’s proposals as described below. further disclosure on climate risks,
governance and risk management as part
Prudential Regulation Authority (PRA) of their financial reporting. This enhances
The PRA has been at the forefront of and builds on disclosure requirements
addressing climate change within the which affect other companies such as the
financial institutions sector. It was among FRC’s UK Stewardship Code for investors
the first regulators to have published its and the requirement for large companies
assessment of the impact of climate to report on how directors have
change on the insurance sector with its considered their various duties under
Supervisory Statement SS3/19 and section 172 of the Companies Act 2006.
Policy Statement PS11/19 being issued This includes the duty to consider the
in April 20197. The PRA has made it impact of the company’s operations on
clear that boards must understand, the community and the environment,
assess and address financial risks arising which requires boards to take into
from climate change. In addition, they account the environmental, social and
must allocate responsibility for managing governance impact of decisions made
climate risks to the most suitable existing by the company.
5 See FSI Papers No 20 of 6 November 2019 – Turning up the heat – climate risk assessment in the
insurance sector.
6 See our October 2019 briefing EU Sustainable Finance Action Plan: Status Table.
7 See our November 2019 Briefing Sustainable Finance: the impact for Banks and Investments
4 CLIFFORD CHANCE
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEADFinancial Conduct Authority (FCA)8 sustainability, and the demand for “green”
The UK FCA has also set out its climate financial products, the FCA has also
change priorities in its feedback statement emphasised that it will take appropriate
FS19/6 published in October 2019. The action to prevent consumers being misled
FCA intends to publish a consultation by greenwashing, i.e. companies making
paper in early 2020 proposing new unfounded or exaggerated claims
disclosure rules aligned with the TCFD regarding the environmental credentials or
Recommendations on a ‘comply or benefits of their products.
explain’ basis. Such rules if implemented,
would potentially accelerate the UK The below timeline provides an overview
government’s current plan to require of the expected timing of various key
certain listed issuers to start disclosing on initiatives coming into effect over the
climate risks from 2022. Given the focus next two years.
consumers themselves have on
Task Force on Climate TCFD Recommendations on disclosure UK Green Finance Strategy: all UK
Related Disclosures (TCFD) listed companies and asset owners
expected to disclose in line with
TCFD recommendations by 2022
IAIS
Ongoing monitoring of IAIS Annual Conference
supervisory practice (focus on climate change)
(November 2020)
Sustainability-related disclosures on insurance-based
b investment products (March 2021)
European Union Integration of climate risk
considerations into Solvency II
(including Prudent Person Principle)
(under consideration - potentially 2022)
EU Sustainable Finance Taxonomy
(staggered implementation from
31 December 2021)
FCA/PRA
Allocating climate risk to a Senior Management Function and inclusion in ORSA and ICAAP (in force)
Bank of England Biennial Exploratory Scenario stress testing
(scenarios published in H2 2020, results in 2021)
UK Corporate
Governance S.172 statement requirement (including reporting on environmental consideration) (in force)
FRC Stewardship
Code UK Stewardship Code 2020
JAN 2020 JAN 2021 JAN 2022
Recommendations
KEY
Regulations and policy guidance
Pressure groups co-operating under the slogan
In addition to the legal and regulatory BlackRock’s Big Problem. BlackRock
requirements on climate change and itself has subsequently joined the
policyholders’ expectations, various pressure group Climate Action 100+.
grassroots movements and pressure Siemens was similarly forced by the
groups may also influence insurers’ group Fridays for Future, among other
approach to climate change. These groups, to put in place oversight
groups exert significant influence on arrangements in respect of sustainability
public opinion and have the media’s issues in relation to the planned
attention. Recent examples include construction of a major coal mine
BlackRock’s decision to shift its business in Australia.
model towards green and ESG compliant
investments following pressure from The table below provides a high level
various activist groups including Extinction overview of some key pressure groups
Rebellion and a coalition of groups relevant to (re)insurance firms.
8 See our October 2019 briefing Sustainability Snapshot: UK FCA signals next steps in its strategy on climate
change and green finance
CLIFFORD CHANCE 5
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEADPressure Group Relevant goals Actions
ClientEarth Better disclosure of environmental and Reported several insurers to the FCA for failing to
climate risks by companies adequately disclose climate risks
Climate Action 100+ Ensuring the world’s largest greenhouse Pressuring greenhouse gas emitters to put in place better
gas emitters take action on climate governance and disclosure through influencing their
change9 institutional shareholders
Asset Owners Engaging with the largest financial investors Calling out pension funds for lack of disclosure of their
Disclosure Project on responsible investing10 responses to climate change
Unfriend Coal Stopping insurers from underwriting risks in Naming and shaming insurers underwriting coal projects
relation to the coal industry11
Disrupted the 2018 Rendez-Vous de Septembre in
Monte Carlo.
WWF Protecting World Heritage Sites12 Currently producing a guide for insurers on how to prevent
or reduce the risk of insuring and investing in companies or
projects whose activities could damage World Heritage sites
Extinction Rebellion Stopping biodiversity loss and reaching net Physical disruption and blocking of insurance offices to
zero greenhouse gas emissions by 202513 highlight the role of the insurance sector in the fossil
fuel industry
What’s next? culture and risk management framework.
With the focus on climate change, insurers In addition, insurers should be aware of
should and will be expected to take the impact pressure groups may have on
climate change risks seriously in all their activities.
aspects of their business, on both sides of
Insurers wield considerable power as
the balance sheet. Insurers will need to
some of the world’s largest investors and
fully understand the impact of climate
asset managers. Their capacity to create
change on their business and to respond
innovative products which respond to
appropriately. Regulatory developments
climate change issues such as parametric
are likely to also impose the need for
reinsurance and ILS and their expertise in
further scenario analysis and stress testing,
risk modelling make insurers ideally
as will additional disclosure and reporting
placed to have a significant impact in the
requirements on firms’ ESG policies. Whilst
fight against climate change.
in the UK an individual senior manager will
Policymakers, regulators and pressure
need to have responsibility for climate
groups are challenging insurers to
change, the need to focus and take
embrace this role. The 2020s will be the
climate change into account should not be
decade for insurers to step up to this
ascribed to just one individual or team, but
challenge and lead from the front.
will need to form part of the insurer’s
9 Source: http://www.climateaction100.org/
10 Source: https://aodproject.net/
11 Source: https://unfriendcoal.com/
12 Source: https://wwf.panda.org/wwf_news/press_releases/?341718/UN-WWF-and-worlds-insurers-to-
develop-pioneering-industry-guide-to-protect-World-Heritage-Sites
13 Source: https://rebellion.earth/the-truth/demands/
6 CLIFFORD CHANCE
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEADCONTACTS
Cheng Li Yow Patrick Killing
Partner Lawyer
London London
T: +44 20 7006 8940 T: +44 20 7006 2635
E: chengli.yow@ E: patrick.killing@
cliffordchance.com cliffordchance.com
CLIFFORD CHANCE 7
CLIMATE CHANGE IN THE 2020s: THE DECADE FOR INSURERS TO LEADThis publication does not necessarily deal
with every important topic nor cover
every aspect of the topics with which it
deals. It is not designed to provide legal
or other advice.
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