IAIS and Climate-related Risks in Insurance
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Questions and Answers

Which organization emphasizes the importance of supervisor engagement in climate-related risks?

  • The International Monetary Fund
  • The Financial Action Task Force
  • The World Health Organization
  • The Insurance Development Forum (correct)

What is a potential impact of climate change on investment risk for insurers?

  • Increased returns from carbon-intensive investments
  • Decreased value of investments in climate-sensitive sectors (correct)
  • Guaranteed stability of investment portfolios
  • Higher liquidity in renewable energy investments

Which type of risk could arise from a lack of reliable climate-sensitive information?

  • Operational risk
  • Strategic risk
  • Reputational risk
  • Investment risk (correct)

How might climate-related risks affect operational costs for insurers?

<p>Due to damage to the insurer’s own assets (B)</p> Signup and view all the answers

What are supervisors recommended to assess regarding climate-related risks?

<p>The materiality of climate-related risks to insurers (B)</p> Signup and view all the answers

Which element contributes to procyclical market dynamics in relation to climate risk?

<p>Uncertainty in climate-sensitive exposures (A)</p> Signup and view all the answers

What is one of the broader impacts of climate-related financial risks on the economy?

<p>Transmission of risks to the financial sector (A)</p> Signup and view all the answers

How have some supervisors adjusted their supervisory objectives recently?

<p>To include sustainability aspects (B)</p> Signup and view all the answers

What prevents the development of an Application Paper related to ICPs 14 and 17 at this time?

<p>Pending revisions during the monitoring period of the Insurance Capital Standard Version 2.0. (A)</p> Signup and view all the answers

What is a consequence of including ICP 19 in the scope of examination?

<p>Reputational risk could increase significantly for insurers. (A)</p> Signup and view all the answers

Which supervisory tool is specifically mentioned for assessing climate change impacts on the insurance sector?

<p>Macroprudential stress testing. (D)</p> Signup and view all the answers

Which of these actions may insurers take to reduce their exposure to climate-related risks?

<p>Exclude coverage for specific perils. (B)</p> Signup and view all the answers

Why is ICP 24 not included in the scope of this Paper?

<p>An Application Paper dealing with it is being developed separately. (D)</p> Signup and view all the answers

What emerging solution can assist jurisdictions in managing financial consequences of catastrophic weather events?

<p>Public-private partnerships. (B)</p> Signup and view all the answers

What undesirable outcome may arise from an insurer's microprudential actions in response to climate risks?

<p>Higher socio-economic inequality among policyholders. (C)</p> Signup and view all the answers

What does the term 'greenwashing' refer to in the context of insurance?

<p>Misleading claims about a company's environmental practices. (B)</p> Signup and view all the answers

What is the primary focus of the Application Paper regarding climate-related risks?

<p>To provide guidance for supervisors in implementing specific ICPs (A)</p> Signup and view all the answers

Which type of risk involves potential claims under liability policies related to climate change?

<p>Liability risk (B)</p> Signup and view all the answers

How does transition risk manifest during the shift to a low-carbon economy?

<p>As a disruption affecting asset values and business costs (B)</p> Signup and view all the answers

Which ICP topic is specifically excluded from ComFrame standards in the context of this Paper?

<p>ICP 20 (Disclosures) (D)</p> Signup and view all the answers

Which of the following risks is concerned with physical phenomena associated with climate change?

<p>Physical risk (C)</p> Signup and view all the answers

What does the term 'climate risk' encompass according to the content provided?

<p>All liabilities and risks related to climate change (A)</p> Signup and view all the answers

Which ICP topic focuses on the corporate governance aspect within the insurance sector?

<p>ICP 7 (Corporate Governance) (C)</p> Signup and view all the answers

In addressing climate-related risks, which group of insurance entities is primarily targeted by the ICPs?

<p>Both primary insurers and reinsurers (B)</p> Signup and view all the answers

What is the primary purpose of Application Papers?

<p>To provide examples and recommendations for implementing supervisory material. (C)</p> Signup and view all the answers

How does the proportionality principle apply to Application Papers?

<p>It allows the content to vary based on the size and complexity of the organization. (D)</p> Signup and view all the answers

What is one key focus of Section 4 concerning Risk Management and Internal Controls?

<p>Integrating climate-related risks into risk management systems. (B)</p> Signup and view all the answers

What role does senior management play according to the corporate governance section?

<p>They have specific duties tied to governance and strategic management. (A)</p> Signup and view all the answers

With respect to investments, what is a major consideration addressed in the guidelines?

<p>Assessing the long-term impact of investments on climate change. (C)</p> Signup and view all the answers

What aspect does the Own Risk and Solvency Assessment (ORSA) primarily address?

<p>Stress testing and scenario analysis focused on climate-related risks. (C)</p> Signup and view all the answers

What is a vital component of supervisory reviews as indicated in the guidelines?

<p>Gathering and sharing information effectively among stakeholders. (C)</p> Signup and view all the answers

In terms of climate-related risks, what is necessary for Control Functions?

<p>To possess and demonstrate a strong understanding of related risks. (D)</p> Signup and view all the answers

What does the public disclosure section emphasize regarding corporate governance?

<p>Acknowledging insurance risk exposures is crucial for stakeholder trust. (C)</p> Signup and view all the answers

What is a central theme related to corporate governance mentioned in the content?

<p>Balance between oversight and management responsibilities. (D)</p> Signup and view all the answers

Which area is highlighted concerning the allocation of responsibilities among the Board members?

<p>Clear delineation of oversight responsibilities is essential. (B)</p> Signup and view all the answers

What does the acronym ALM stand for in the context of investments?

<p>Asset liability management. (A)</p> Signup and view all the answers

Which statement best captures the objective related to integration of climate-related risks?

<p>Intertwining climate-related risks into all levels of risk management. (A)</p> Signup and view all the answers

What should supervisors be aware of regarding the context and objective of their roles?

<p>They must consider varying circumstances and challenges in supervision. (C)</p> Signup and view all the answers

What is a key focus of the pilot project led by the Bank of Canada and OSFI in relation to climate-change scenarios?

<p>Understanding the risks of transitioning to a low-carbon economy (C)</p> Signup and view all the answers

Which aspect of climate change has the Financial Supervisory Commission (FSC) in Chinese Taipei specifically required insurers to assess in their ORSA Supervisory Reports?

<p>The impact of climate change on various forms of risk including physical, transition, and liability risks (C)</p> Signup and view all the answers

In Canada, what type of climate risk impacts were included in the stress testing during 2019?

<p>Both first-order impacts from physical asset loss and second-order impacts from market shifts (C)</p> Signup and view all the answers

What is one of the requirements for insurers according to the FSC in Chinese Taipei regarding climate change risk management?

<p>To disclose the challenges faced when conducting climate change risk management (C)</p> Signup and view all the answers

What kind of losses related to typhoons are being incorporated into stress test scenarios by the FSC in Chinese Taipei?

<p>Associated losses due to physical damage and market reaction (C)</p> Signup and view all the answers

Which of the following best describes the overall purpose of including climate change scenarios in the ORSA process?

<p>To understand and manage potential risks related to climate change effectively (A)</p> Signup and view all the answers

What specific impacts have IAIGs in Canada been assessing over the last two years regarding climate risk?

<p>Both first-order impacts from physical asset loss and second-order impacts from shifts to green industries (D)</p> Signup and view all the answers

What type of institutions are participating in the pilot project initiated by Bank of Canada and OSFI?

<p>A voluntary small group from banking and insurance sectors (A)</p> Signup and view all the answers

What is the primary purpose of tools and metrics used by insurers in relation to climate-related risks?

<p>To monitor underwriting exposures and concentrations in higher risk areas (D)</p> Signup and view all the answers

How does the Own Risk and Solvency Assessment (ORSA) impact an insurer's approach to climate-related risks?

<p>It encourages the consideration of all material risks linked to climate change (C)</p> Signup and view all the answers

In relation to climate-related risks, what element must insurers account for during the ORSA process?

<p>All material risks, including liabilities and operational risks (B)</p> Signup and view all the answers

What is a critical feature of the time horizon an insurer should adopt in its ORSA for climate-related risk assessment?

<p>It should be consistent with the insurer’s risks and business planning (A)</p> Signup and view all the answers

Why is it important for insurers to analyze climate-related risks over a longer time horizon during ORSA?

<p>To accommodate for potential future risks that take time to materialize (D)</p> Signup and view all the answers

What does continuity analysis in ORSA primarily assess regarding climate-related risks?

<p>The ability to manage risks and meet capital requirements under adverse scenarios (B)</p> Signup and view all the answers

Which of the following is a component that insurers must include in their stress testing related to climate risks?

<p>The identification of both direct and indirect impacts of climate-related risks (B)</p> Signup and view all the answers

What is expected of supervisors concerning the ORSA process of insurers dealing with climate risks?

<p>Supervisors should expect consideration of all material physical, transition, and liability risks (C)</p> Signup and view all the answers

Flashcards

Application Papers

Guidance documents for supervisors on implementing supervisory material, providing advice, illustrations, and examples, but not new requirements.

Proportionality Principle

Ensuring that supervisory requirements are appropriate, considering the size and complexity of entities.

Supervisor's Role

Overseeing insurers to ensure compliance, including reviewing and reporting on their performance and practices.

Corporate Governance

How an insurance company is managed and directed to maintain sound practices and oversight.

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Risk Management

Process of identifying, assessing, and mitigating risks faced by an insurance company.

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Climate-related Risks

Risks arising from climate change, including extreme weather events and transition risks.

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Internal Controls

Processes and procedures to ensure compliance, risk prevention, and reliable reporting.

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Enterprise Risk Management (ERM)

Management of all risks impacting an insurance company, including climate-related ones.

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Underwriting Policy

Procedures for accepting and managing insurance risks.

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ORSA (Own Risk and Solvency Assessment)

Insurers' self-assessment of their risks and solvency.

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Investments

The placement of insurance company funds in various assets to enhance returns while managing risks.

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Public Disclosure

Communicating significant information about the company's activities, performance and risks to stakeholders.

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Supervisory Review

The process of evaluating a company to assess how effectively and ethically it operates.

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Information Gathering

Collecting data on the company's practices for quality assurance.

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Climate-Related Risks in Investments

Assessment of the potential financial impact of climate change on investment decisions.

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Environmental risk

Risk to insurers from activities that could harm or be impacted by environmental damage.

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Liability risk

Risk of claims against insurers due to climate-related incidents or their handling of climate risks.

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Physical risk

Increased losses from climate-related events and trends (e.g., storms, rising sea levels).

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Transition risk

Disruptions from the shift to a low-carbon economy, affecting assets and costs.

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ICP

International Core Principle. Standards for supervising insurance companies.

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ComFrame

Common Framework for supervising International Insurance Groups.

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Supervisory Review and Reporting

Monitoring and reporting on a company's climate risks under ICP 9 (Supervisory Review and Reporting).

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ICP 14 and 17

Insurance Capital Standards (ICPs) 14 and 17 dealing with valuation and capital requirements are scheduled for revision, therefore are not included in this paper.

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ICP 19 (Conduct of Business)

Conduct of business, though relevant to reputational risk and "greenwashing", is outside the scope of this paper due to its different focus on prudential supervision.

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ICP 24 (Macroprudential Supervision)

Climate change's system-wide impact, while relevant to insurance sector risk, is excluded from this specific paper as a separate paper on this topic is currently in development.

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Greenwashing

The act of misleading consumers about a company's environmental impact by emphasizing marketing rather than actual reduction efforts.

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Microprudential Perspective

Insurer actions, such as raising premiums or excluding policies, deemed justified from an individual company's financial stability and risk-management standpoint.

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Macroprudential Supervision

Supervisory actions considering the system-wide implications of an issue like climate change and its impact on the insurance sector as a whole.

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Availability & Affordability of Insurance

Concerns about the cost and access to insurance due to increased climate-related events and disasters.

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Public-Private Partnerships

Emerging collaborations between governments and private sector entities to manage the financial consequences of catastrophic weather-related events.

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Supervisor's Role in Climate Risk

Supervisors oversee insurers to ensure they manage climate-related risks effectively, which could impact their financial stability and the economy.

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Impact of Climate Change on Insurers

Climate change can affect insurers through various risks, such as investments in climate-sensitive sectors, uncertainty in future claims, and operational disruptions.

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Prudential Risks from Climate Change

These risks affect the financial stability of insurers, including investment risk, liquidity risk, and operational risk.

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Investment Risk & Climate Change

Insurers may lose money if their investments are in sectors affected by climate change, like fossil fuels.

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Liquidity Risk & Climate Change

Uncertainty about climate-related exposures can lead to volatile markets, making it harder for insurers to get cash when they need it.

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Operational Risk & Climate Change

Extreme weather or climate-related disruptions can damage an insurer's offices, IT systems, or even their ability to process claims.

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Climate-Related Risks & Economy

Supervisors need to assess how climate risks to insurers can spill over to the broader economy.

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Sustainability in Supervision

Some regulators are including sustainability in their goals, showing a growing focus on managing climate risks.

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Concentration Risk

The risk that a large proportion of an insurer's portfolio is exposed to a single geographical area or sector, making it vulnerable to climate-related risks.

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Mitigating Measures

Actions taken by insurers to reduce the impact of climate-related risks on their business, such as changing underwriting policies or investments.

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Material Climate-Related Risks

Risks arising from climate change that are significant enough to potentially impact an insurer's financial performance or solvency.

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Stress Testing

Simulating various adverse scenarios, including those related to climate change, to assess an insurer's resilience and ability to manage risks.

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Continuity Analysis

Evaluating an insurer's capacity to operate and meet regulatory requirements in the face of challenging scenarios, such as extreme weather events.

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Time Horizon

The length of time an insurer considers when assessing its risks and future financial performance, including climate-related risks.

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Scenario Analysis

Exploring various possible future outcomes, including those related to climate change, to understand their potential impact on the insurer's business.

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Immateriality in ORSA

Risks considered too small to affect the insurer's overall risks and solvency, so not included in the detailed ORSA report. It's an exception, not the norm.

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Climate Risk Scenario in Stress Testing

Simulating the potential impact of climate change on an insurer's finances, using specific scenarios like extreme weather events, or shifts towards a low-carbon economy.

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First-Order Impact

Direct, immediate consequences of climate change on an insurer, like physical damage to assets due to extreme weather.

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Second-Order Impact

Indirect consequences of climate change on an insurer, like changing investment values due to shifts in industries (e.g., fossil fuels).

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Climate Change Impact Assessment

Evaluating the potential financial impact of climate change on an insurer's operations, including identifying specific risks, assessing their severity, and developing response strategies.

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Physical Risk (Climate)

Increased losses from climate-related events, like storms, floods, or rising sea levels, impacting insurer's insured assets or operations.

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Transition Risk (Climate)

Disruptions to an insurer's operations and investments due to the shift to a low-carbon economy, affecting assets and costs.

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Liability Risk (Climate)

Increased risk of claims against insurers due to climate-related incidents or their handling of climate risks (e.g., failing to adequately assess or disclose climate risks).

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Study Notes

  • The International Association of Insurance Supervisors (IAIS) is a voluntary membership organization of insurance supervisors/regulators.
  • The IAIS's mission is promoting effective, globally-consistent insurance industry supervision, fair, safe and stable insurance markets, protecting policyholders, and bolstering global financial stability.
  • The IAIS works with international financial policymakers and associations of supervisors/regulators to shape financial systems globally.
  • The IAIS collaborates with the G20 and other international standard-setting bodies.
  • The UN-convened Sustainable Insurance Forum (SIF) aims to strengthen understanding and responses to insurance sector sustainability issues.

Application Papers

  • Application Papers provide supplementary material related to supervisory material (ICPs and/or ComFrame).
  • They support the practical application of principles and standards.
  • They do not introduce new requirements but provide best practices.
  • Application Papers comply with the proportionality principle.

Contents of Application Papers

  • Introduction and context
  • Work by the SIF and IAIS
  • Proportionality and terminology
  • Role of the Supervisor (conditions, resources, review and reporting)
  • Corporate Governance (allocation of oversight, business objectives)
  • Risk Management and Internal Controls (integrating climate-related risks)
  • Enterprise Risk Management for Solvency Purposes (underwriting policy, consideration of climate-related risks in ORSA)
  • Investments (climate-related impacts)
  • Public Disclosure (general disclosure requirements)
  • Climate change: Warming of the world's climate system.
  • Sustainability risk: Risks associated with ESG factors.
  • Climate-related risk/climate risk: Risk posed by climate change (physical, transition, liability).
  • Environmental risk: Risk caused by/affected by environmental degradation/activities.

Scope and Supervision

  • The IAIS Application Paper focuses on ICPs 9, 7, 8, 16, 15 and 20.
  • It's about integrating climate-related risks into supervision of the insurance industry—identifying, monitoring, assessing, and mitigating risk in the insurance sector(assessing the effects on business and financial sectors).
  • The paper also touches upon relevant but not included ICPs like 14, 17, 19, and 24 (more papers are being developed to address those).

Prudential Risks & Climate Change

  • Climate change impacts the value of investment portfolios, and reduces reliability of and increases volatility of claims-experience—thereby increasing risks to liquidity.
  • It affects operational, reputational, and strategic risks.
  • Climate-related risks could lead to materiality in underwriting policies and risks relating to the business planning horizon, localization/duration of goods & persons, and/or the impact of perils.
  • Effective supervision requires conditions like sound/sustainable macroeconomic policies, and considerations of public infrastructure, and efficiency of financial markets, which are beyond the supervisor's control.

Own Risk and Solvency Assessment (ORSA) & Climate Change

  • ORSA is a useful tool for insurers to assess adequacy of their enterprise risk management framework (ERM) and capital positions—for risks related to climate change.
  • Supervisors expect insurers to consider all material risks into their ORSA process.
  • Insurers need a longer time frame to assess risks given that materialization of the impact of climate-related risks could take time.
  • Scenario analysis of climate change (physical, transition and/or liability risks) is critical.
  • Stress testing climate change impacts is essential.

Further Considerations

  • Supervisors should implement effective tools/metrics for monitoring climate risk exposures.
  • Supervisors should encourage insurers to develop, implement, and utilize tools/policies to deal with climate-related risks.

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Application Paper on the Supervision of Climate-Related Risks in the Insurance Sector PDF

Description

Explore the role of the International Association of Insurance Supervisors (IAIS) in managing climate-related risks within the insurance sector. This quiz examines the IAIS's mission to ensure fair and stable insurance markets and its collaborative efforts with global financial entities. Test your knowledge of the IAIS's initiatives and Application Papers.

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