Climate change risk governance

This report forms part of a drive towards co-construction and good practice sharing. It brought together twenty-one insurance and re-insurance groups as well as three trade associations for four round-table discussions scheduled between April and June 2021, during which the various aspects of climate governance were studied according to five topics: strategy, risk management, communication, role in awareness-raising and internal organisation.

Without being exhaustive, the practices detailed in this document illustrate the way in which (re)insurers have taken into consideration all the issues related to the impacts of climate change and are acting to strengthen their governance of climate risks. This report can serve as a source of inspiration for institutions in their efforts to integrate climate change risks.

Furthermore, the regulatory framework dedicated to the consideration of the climate risk is undergoing tremendous changes, whether they be at the European level, with the publication of the taxonomy regulation, the implementation of the SFDR (Sustainable Finance Disclosure Regulation), the review of the Solvency II Directive, and discussions around the CSRD (Corporate Sustainability Reporting Directive), or at the national level in France with the 2019 Energy and Climate Law. This changing regulatory background implies the need for a regular reassessment of the adequacy of practices referred to in this document. Work on this topic is to be continued with that purpose in mind.

This report focuses on the risks related to the exposure of (re)insurers to the physical, transition and liability risks that stem from climate change. In the interest of simplification, risks related to climate change will be referred to as “climate risks” in the remainder of this document. It should be noted that these risks have various time horizons, which complicates their understanding. The definitions of these climate risks are based on the first report by the NGFS and on ACPR publication No. 102:

• Physical risk measures the direct impact of climate change on persons and goods. For (re)insurers, it stems from an increase in the frequency and costs associated with extreme weather events (droughts, floods, etc.) on physical assets and the consequences of global warming on life risks (new areas impacted by malaria, etc.). Physical risk has a direct impact on undertakings, both through the impairments in value associated with assets held by (re)insurers and through changes in the frequency and cost of these risks on the liability side of the balance sheet.

• Transition risk stems from a change in the behaviour of economic and financial agents as a result of the implementation of regulatory developments, energy policies or technological changes. Transition risk has an impact on undertakings through decreases in the value of assets the activities of which are considered as polluting or not compatible with the ecological transition, through changes in exposures, but also through the loss of insurance contracts concerning these activities or stemming from a shift in consumer preferences.

• Liability risk corresponds to the damages that a legal entity would have to pay if it were held liable for global warming. (Re)insurers are exposed to this risk: directly, where these institutions are held liable for having contributed to the consequences of climate change, a liability that is certainly difficult to establish, and indirectly, if the institution is exposed to companies that are held liable themselves, through the channels of counterparty risk, market risk and reputation risk.

Furthermore, it should be noted that this report focuses both on the measures taken by insurers to adapt to climate risks, particularly through balance sheet risk management, and on the measures and actions taken to contribute to the mitigation of climate change. Firstly, the report develops how the undertakings organise themselves (so as) to adapt to these emerging risks by addressing the following topics: strategy, risk management and internal organisation. Then it continues on to the relationship between the undertakings and their stakeholders by elaborating on how they communicate and how they intend to raise awareness.

This report is the result of discussions between the Authority and participants in round-table meetings that marked the first work undertaken with the financial centre on this topic. This work could be continued to further develop or broaden certain topics so as to continue making progress on this fundamental issue.