European insurance industry urged to examine exposure to climate risks
The European Insurance and Occupational Pensions Authority (EIOPA) is warning insurers must strike a balance in preparing for the increased frequency of natural catastrophe claims, while also ensuring financial protection remains affordable for policyholders.
It has been prompted by the exposures the insurance industry is facing through the escalating frequency and severity of extreme weather-related events.
The EIOPA has published its Discussion Paper on European insurers' exposure to physical climate change risks which centres on a large data collection exercise that focused on property, content and business interruption insurance against windstorm, wildfire, river flood, and coastal flood risks.
The Paper, based on a sample that represents at least 50% coverage at national level for 24 European Economic Area jurisdictions, is the first step as part of its sustainable finance strategy. The EIOPA aims to establish supervisory expectations for the management of nature-related risks and impacts in a step-by-step approach.
Various tools are being developed and tested to assess risk exposures and identify how financial flows contribute directly or indirectly to nature-related risks.
The insurance sector's ability to provide financial protection against the consequences of extreme weather events relies on their ability to assess and understand the likely impact of climate change and adapt their business strategies. However, the Paper indicates that more than half of the study's participants have not undertaken any climate analyses.
Companies and financial institutions will be required to regularly monitor, assess and disclose risks, dependencies and impacts on biodiversity; and provide information to consumers to promote sustainable consumption.
The Paper states that: ”Biodiversity underpins healthy and nutritious diets and improves rural livelihoods and agricultural productivity. More than 75% of global food crop types rely on animal pollination. Estimates have been made of biodiversity loss that could lead to between €1.7 trillion and €3.9 trillion losses each year.
“In this context it is vital to consider what the role of the insurance sector can be in contributing to the restoration and conservation of nature through investment and underwriting activity and to assess from a prudential perspective how nature-related risks can affect (re)insurers’ balance sheets and business more generally.”
The Paper highlights four potential liability side impacts that increased climate related physical risks may have on a non-life (Re)insurer's balance sheet. These include:
Reserving risk – Direct consequences stemming from physical climate change risks may affect the liability side of non-life (re)insurance firms’ balance sheets through several lines of business such as fire and other damages to property, motor property damage, crop damage and marine, aviation and transport.
Pricing Risk - Insurance companies may turn to re-pricing strategies to reduce increased exposure to climate risks. It could make insurance coverage unaffordable for policy holders causing reputational damage to the insurance sector.
Underwriting Risk - Changes to underwriting strategies might widen protection gaps or create new ones.
Reinsurance Risk - An increase in the frequency and severity of weather events worldwide will eventually affect the reinsurance premium, terms and conditions of reinsurance treaties.