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Sustainable Insurance: The Emerging Agenda for Supervisors and Regulators

September 11, 2017 |

This report was developed by The Sustainable Insurance Forum, The UN Environment Inquiry & UN Environment’s Principles for Sustainable Insurance.

Executive Summary: 

“Key sustainability factors are now recognized as potentially significant for the success, safety and soundness of the insurance sector – inspiring reactions by supervisors and regulators. In its role as risk manager, risk carrier and investor, the global insurance sector plays a cornerstone role in the management of sustainability-related risks and opportunities. The risk transfer tools of insurance along with the deployment of its long-term capital base are highly relevant for many of the 17 Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change. Of the range of interlocking sustainability challenges, three issues stand out as critical: i) natural hazards, where only 30% of losses are insured, and just 2% in low- and middle-income countries; ii) climate change, set to exacerbate physical risks and requiring investment in decarbonization; and iii) access and affordability, with insurance a critical element of basic economic resilience against environmental hazards and shocks.

The insurance sector is responding to sustainability challenges with strategic action across both underwriting and investment, including through the UN-backed Principles for Sustainable Insurance (PSI). Leading insurers are incorporating environmental factors into the provision of insurance coverage and their underwriting strategies, reallocating capital towards green assets, and integrating environment, social and governance (ESG) factors in asset allocation and stewardship activities. Such approaches are not, however, the norm: only 20% of global premium volume is covered by companies that have signed the PSI.

Policymakers are recognizing that reforms within the financial system as a whole can be helpful to effectively mobilize private capital to respond to sustainability challenges. Global momentum on sustainable finance policy and regulation has advanced significantly, with recent action at the international level such as Financial Stability Board’s Task Force on Climate-related Financial Disclosures (FSB TCFD) and the G20’s Green Finance Study Group (GFSG).

A growing number of insurance supervisors and regulators are beginning to incorporate sustainability into the way they oversee the sector. Over the last two years, there has been a noted shift in how supervisory and regulatory institutions are approaching sustainability issues, with a growing number of authorities taking action based on their core prudential mandates and extending these to new environmental threats:

  • Australia: In 2017, Australia’s financial regulator set out a new agenda for the consideration of climate change as a prudential risk, with plans to engage with firms and build internal capacity.
  • Brazil: In 2016, Brazil’s insurance regulator has engaged with firms to understand the management and strategic perception of environmental issues, informing supervision.
  • China: In 2016, China released its guidelines for a green financial system, which included efforts to advance the framework for environmental liability insurance.
  • France: As part of its 2015 energy transition plan, France has required institutional investors, including insurance companies, to report on the implications of ESG risks and climate alignment.
  • Morocco: Following from a national sustainable finance roadmap launched at COP22, Morocco’s insurance regulator is working to build a sustainable insurance strategy for its marketplace.
  • Netherlands: Following an assessment of energy transition risks in 2016, the Dutch Central Bank is examining climate risks facing insurers, and integrating climate factors into stress tests.
  • Philippines: In addition to a leading microinsurance regulatory framework, the Philippines is exploring disaster risk insurance mechanisms at the local government and sovereign levels.
  • Sweden: In 2016, Finanspektionen released assessments of climate risks and financial stability, and an examination of its supervisory role in contributing to sustainable development.
  • UK: In 2015, the Bank of England examined the impacts of climate change on the UK insurance sector, and is now advancing a bank-wide strategy on climate and green finance.
  • US – NAIC: The US National Association of Insurance Commissioners introduced its first climate risk survey in 2009, and has integrated climate factors into supervisory toolkits.
  • US – California: The Insurance Commissioner’s 2016 Climate Risk Carbon Initiative set new requirements for insurers to disclose fossil fuel investments, with a request to divest from coal.
  • US – Washington State: The Office of the Insurance Commissioner is taking a multi-stakeholder approach to build awareness of insurance and climate resilience issues, including land use.

Across this emerging body of experience, commonalities suggest a five-step framework for action:

1. Initial Assessment: Supervisors often start by assessing the materiality of sustainability issues for the insurance sector, and implications for core mandates, objectives and strategies.

2. Deepening Risk Analysis: Supervisors may explore how environmental factors can be better evaluated and integrated into routine supervisory oversight at the firm level, as well as system level stress testing.

3. Improving Information: Supervisors may gather information from firms and promote enhanced disclosure through voluntary guidance, surveys, and implementation of mandatory requirements, as well as enhancing transparency for consumers.

4. Market Transformation: Supervisors can support new insurance markets through product frameworks and partnership facilities, and encourage change in investment practice by building awareness, promoting green financial markets, and examining regulatory barriers.

5. Making Systemic Linkages: Finally, supervisors may explore connections between insurance and other financial sectors, real economy policy frameworks, and wider sustainable finance processes.

The goal of the Sustainable Insurance Forum (SIF) is to strengthen insurance supervisors’ and regulators’ understanding of and responses to sustainability challenges for the business of insurance. Convened by UN Environment, the SIF provides a global platform for knowledge sharing, policy dialogue, international collaboration, and identification of best practices. The Forum is working on a six-track work programme in 2017, focusing on disclosure, access and affordability, sustainable insurance roadmaps, climate risks to investments, disaster risk reduction and resilience, and capacity building.

The long-term vision of the SIF is of an insurance sector where sustainability factors are effectively integrated into the regulation and supervision of insurance companies. Looking forward from 2017 to 2020, the SIF will work to achieve this goal by facilitating voluntary action by supervisors, delivering practical content, expanding the SIF network, solidifying partnerships, and supporting implementation…”

Read on and access the full report at: United Nations Inquiry into the Design of a Sustainable Financial System.

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