19 January 2021
A group of 22 leading insurers and reinsurers convened by UNEP FI has published the first comprehensive guidance for the insurance industry to identify and disclose the impact of climate change on their businesses. Over the past year, the group has collaborated under the auspices of UN Environment Programme’s (UNEP) Principles for Sustainable Insurance Initiative (PSI) to pilot ground breaking methodologies that insurers can use to implement the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD). Disclosing both the risks and opportunities faced by insurers from a changing climate in line with the recommendations in this framework allows insurers to build a picture of how their business will be challenged both now and in the future, and how to respond.
With USD 30 trillion in assets under management and USD 5 trillion in world premium volume, the insurance industry holds around a third of global economic assets and liabilities on their balance sheets making it one of the largest global industries. As risk managers, insurers and investors can play a big leadership role in building climate-resilient communities and in accelerating the transition to a net-zero global economy.
“The work captured in this report represents the largest collaborative effort by market participants to pilot some of the most challenging TCFD recommendations” said Eric Usher, UNEP Finance Initiative Head. “It also represents a strong collective signal from market participants on what climate change means to the insurance business, what the key challenges are, and what can be done to better understand, manage and disclose climate-related risks and opportunities efficiently and effectively.”
The overall aim of the pilot was to develop consistent and transparent analytical approaches that can be used to identify, assess and disclose climate change-related risks and opportunities in insurance underwriting portfolios. Assessing climate change-related risks based on forward-looking information and scenarios is a central component of the TCFD’s recommendations and is arguably the most challenging to implement. Climate scenarios provide a cornerstone for the analyses presented here, with their use consistently applied across risk classes.
Potential climate change-related risks and opportunities that insurers could face can be classified into three categories:
- Physical risks related to changes in weather patterns, temperature and hydrological conditions.
- Transition risks as the world moves towards a net-zero emissions economy and related fundamental changes in, for example, energy, food and transport systems.
- Potential litigation risks pertaining to climate change and breach of underlying legal frameworks on both the business and corporate levels.
- The report recognizes that the insurance industry needs to assess climate change risks in an integrated manner, not only at an underwriting level but also in terms of its investments. It is recognized that to do so is a difficult task and represents a long-term objective. In this vein, the project assessed climate-related physical, transition and litigation risks in underwriting portfolios, with a focus on scenario analysis. While linking insurance underwriting and investment portfolios is ultimately needed, it remains an opportunity for future work.
Download the report here.
UNEP FI’s work with the insurance industry
United Nations Environment Programme Finance Initiative (UNEP FI) is a partnership between UNEP and the global financial sector to mobilize private sector finance for sustainable development. UNEP FI works with more than 350 members – banks, insurers, and investors – and over 100 supporting institutions – to help create a financial sector that serves people and planet while delivering positive impacts.
Launched at the 2012 UN Conference on Sustainable Development, the UNEP FI Principles for Sustainable Insurance serve as a global framework for the insurance industry to address environmental, social and governance risks and opportunities.
Endorsed by the UN Secretary-General, the Principles have led to the largest collaborative initiative between the UN and the insurance industry—the PSI Initiative. Over 140 organisations worldwide have adopted the four Principles for Sustainable Insurance, including insurers representing more than 25% of world premium volume and USD 14 trillion in assets under management. The Principles are part of the insurance industry criteria of the Dow Jones Sustainability Indices and FTSE4Good.