Insurance regulators should consider climate change risks as part of their supervisory practices, the International Association of Insurance Supervisors (IAIS) has said.
In an application paper updating its Insurance Core Principles (ICPs), the IAIS expanded its guidance on climate-related risks. The paper does not introduce new requirements but builds on previous work by providing additional detail, advice and examples following consultations with stakeholders.
The updated guidance outlines approaches for supervisors to assess climate-related risks, incorporate them into supervisory frameworks, and consider their impact on valuation and investment practices.
Eleven ICPs now reference climate risks, up from six previously. The IAIS advises supervisors to review the effects of climate change on insurers’ investments, carry out scenario analysis and stress testing, and consider the role of transition plans in addressing long-term protection gaps.
The paper also encourages insurers to adopt forward-looking risk assessments to supplement historical data within their modelling practices. The association represents insurance regulators and supervisors from more than 200 jurisdictions. Its guidance is not legally binding but is widely used to inform national and local regulatory policies.
Paul Fox, senior researcher at advocacy group Finance Watch, said the report aligned with expectations and expanded the scope of previous guidance.
“It’s really giving detailed requirements with explicit mentions of climate-related risk throughout more of the ICPs,” he said.
Fox added that the revisions were mainly in the wording, with greater clarity and less conditional language. “Before you would have climate-related risk which might, perhaps, possibly impact this requirement here or there … Now you’ve got much more concrete wording explaining that it is going to be a potential financially material risk, getting into more core parts of the framework,” he said.
Fox also noted the inclusion of transition plans as a potential source of data for supervisors, describing them as a useful tool for insurers where available.
The insurance sector is expected to play a role in managing the financial risks associated with climate change. Insurers provide cover for weather-related events such as floods, storms and wildfires, which are expected to become more frequent and severe.
Insurers are also large institutional investors and are increasingly seen as having a role in supporting the transition to lower-carbon economies through investment decisions. Supervisory efforts to integrate climate risk aim to strengthen insurers’ resilience to future claims and to limit potential gaps in protection where insurance may become less available or affordable.
