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

Application Paper on the Supervision of Climate-related Risks in the Insurance Sector About the IAIS The International Association of Insurance Supervisors (IAIS) is a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions. The missio...

Application Paper on the Supervision of Climate-related Risks in the Insurance Sector About the IAIS The International Association of Insurance Supervisors (IAIS) is a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions. The mission of the IAIS is to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability. Established in 1994, the IAIS is the international stand ard setting body responsible for developing principles, standards and other supporting material for the supervision of the insurance sector and assisting in their implementation. The IAIS also provides a forum for Members to share their experiences and understanding of insurance supervision and insurance markets. The IAIS coordinates its work with other international financial policymakers and associations of supervisors or regulators, and assists in shaping financial systems globally. In particular, the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory Council of the International Accounting Standards Board (IASB), and partner in the Access to Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also is routinely called upon by the G20 leaders and other international standard setting bodies for input on insurance issues as well as on issues related to the regulation and supervision of the global financial sector. About the SIF The UN-convened Sustainable Insurance Forum (SIF) is a leadership group of insurance supervisors and regulators working together to strengthen their understanding of and responses to sustainability issues facing the insurance sector. The long-term vision of the SIF is a global insurance system where sustainability factors are effectively integrated into the regulation and supervision of insurance companies. The United Nations Development Programme (UNDP) serves as the Secretariat for the UN-convened SIF. The SIF works closely with the IAIS, delivering collaborative projects and research on climate change issues. As of May 2021, the SIF has 31 jurisdictions as members. Application Papers provide supporting material related to specific supervisory material (ICPs and/or ComFrame). Application Papers could be provided in circumstances where the practical application of principles and standards may vary or where their interpretation and implementation may pose challenges. Application Papers do not include new requirements, but provide further advice, illustrations, recommendations or examples of good practice to supervisors on how supervisory material may be implemented. The proportionality principle applies also to the content of Application Papers. Contents Acronyms................................................................................................................................... 5 1 Introduction......................................................................................................................... 6 1.1 Context and objective................................................................................................. 6 1.2 Related work by the SIF and IAIS............................................................................... 6 1.3 Proportionality............................................................................................................. 7 1.4 Terminology................................................................................................................. 7 1.5 Scope.......................................................................................................................... 8 2 Role of the Supervisor........................................................................................................ 9 2.1 Preconditions and resources.................................................................................... 10 2.2 Supervisory review and reporting.............................................................................. 12 2.2.1 Information gathering and sharing..................................................................... 12 2.2.2 Supervisory feedback and follow-up................................................................. 13 3 Corporate Governance..................................................................................................... 14 3.1 Appropriate allocation of oversight and management responsibilities..................... 15 3.2 Business objectives and strategies of the insurer..................................................... 15 3.3 The role of the Board................................................................................................. 15 3.4 Duties of Senior Management.................................................................................. 16 3.5 Duties related to remuneration.................................................................................. 16 4 Risk Management and Internal Controls.......................................................................... 16 4.1 Integrating climate-related risks into the scope of the risk management system.... 17 4.2 Consideration of climate-related risks by the Control Functions.............................. 17 4.2.1 Risk management function................................................................................ 18 4.2.2 Compliance function.......................................................................................... 18 4.2.3 Actuarial function............................................................................................... 18 4.2.4 Internal audit function........................................................................................ 19 4.3 Fitness and propriety of Control Functions on climate-related issues..................... 19 4.4 Integrating climate-related risks in outsourcing decisions........................................ 19 5 Enterprise Risk Management for Solvency Purposes..................................................... 21 5.1 Underwriting policy.................................................................................................... 22 5.1.1 Consideration of climate-related risks in the underwriting policy...................... 22 5.1.2 Consideration of climate-related risks in the underwriting assessment............ 22 5.1.3 Monitoring of underwriting exposure to climate-related risks........................... 23 5.2 Own Risk and Solvency Assessment (ORSA)......................................................... 24 5.2.1 Stress testing and scenario analysis of climate-related risks........................... 24 6 Investments...................................................................................................................... 28 6.1 Climate-related risks for investments....................................................................... 28 6.2 Asset liability management (ALM)............................................................................ 29 6.3 Risk assessment of investments............................................................................... 29 6.4 Impact of investments on climate change................................................................ 30 7 Public Disclosure.............................................................................................................. 31 7.1 General disclosure requirements.............................................................................. 32 7.2 Company profile........................................................................................................ 32 7.3 Corporate governance framework............................................................................ 33 7.4 Insurance risk exposures.......................................................................................... 33 7.5 Financial investments and other investments........................................................... 33 Acronyms A2ii Access to Insurance Initiative ACPR Autorité de Contrôle Prudentiel et de Résolution ALM Asset-liability management BaFin Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority) BMA Bermuda Monetary Authority BNM Bank Negara Malaysia CSR Corporate social responsibility ComFrame Common Framework for the Supervision of Internationally Active Insurance Groups DNB De Nederlandsche Bank (Dutch Central Bank) EIOPA European Insurance and Occupational Pensions Authority ERM Enterprise risk management ESG Environmental, social and governance EU European Union FSB Financial Stability Board GHG Greenhouse gas emission IAIS International Association of Insurance Supervisors IAIG Internationally Active Insurance Group ICP Insurance Core Principle IDF Insurance Development Forum IPCC Intergovernmental Panel on Climate Change IST Industrywide Stress Test ND-GAIN Notre Dame Global Adaptation Initiative Index NGFS Network for Greening the Financial System OECD Organisation for Economic Co-operation and Development ORSA Own risk and solvency assessment PACTA Paris Agreement Capital Transition Assessment SIF Sustainable Insurance Forum TCFD Task Force on Climate-related Financial Disclosures UK PRA United Kingdom Prudential Regulation Authority UN United Nations UNEP United Nations Environment Programme US NAIC United States National Association of Insurance Commissioners 1 Introduction 1.1 Context and objective 1. Climate change is recognised as an overarching global threat. It impacts human, societal, environmental and economic systems, through rising temperatures and their consequences, including rising sea levels and an increasing frequency/ severity of natural catastrophes and extreme weather events. Climate change, as well as the global response to the threats posed by climate change (eg the reduction of greenhouse gas emissions (GHG) and adaptation programmes) may have wide-ranging impacts on the structure and functioning of the global economy and financial system. 2. There is growing recognition that climate change and climate -related risks are a source of financial risk,1 having an impact on the resilience of individual financial institution s, including insurers, as well as on financial stability. Climate-related risks are material for the insurance sector as they impact the insurability of policyholder property and assets as well as insurers’ operations and investments. Therefore, supervisor s should identify, monitor, assess and contribute to the mitigation of the risks from climate change to the insurance sector. Climate change also presents opportunities for the insurance sector: the insurance industry plays a critical role in the management of climate-related risks in its capacity as an assessor, manager and carrier of risk and as an investor, and is uniquely qualified to understand the pricing of risks. Notably, through risk-based pricing, insurers provide critical economic signals regarding the changing risk environment. Insurers can also help build resilience through (inclusive) insurance.2 3. An adequate response from supervisors to both the risks and opportunities from climate change will support the objectives of insurance supervision of protecting policyholders, contributing to financial stability and promoting the maintenance of a fair, safe and stable insurance market (see Insurance Core Principle (ICP) Standard 1.2). 4. This Application Paper aims to support supervisors in their efforts to integrate climate risk considerations into the supervision of the insurance sector. It provides background and guidance on how the IAIS supervisory material can be used to manage the challenges and opportunities arising from climate-related risks. Application Papers do not establish standards or expectations, but instead provide additional guidance to assist implementation and provide examples of good practice. This Paper thereby also aims to promote a globally consistent approach to addressing climate-related risks in the supervision of the insurance sector. This, however, is an iterative and dynamic process given that the understanding of the challenges and opportunities presented by climate-related risks will improve and evolve as the guidance provided is increasingly embedded in supervisory practices. 1.2 Related work by the SIF and IAIS 5. Since initiating a strategic partnership with the Sustainable Insurance Forum (SIF) in 2017, the International Association of Insurance Supervisors (IAIS) has identified climate risk and sustainability as a strategic focus. In July 2018, the SIF and the IAIS released a joint Issues Paper on Climate Change Risks to the Insurance Sector (“2018 Issues Paper”). As a follow-up, the SIF and IAIS published a second Issues Paper in February 2020 on the Implementation of the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) (“2020 Issues Paper”).3 1.3 Proportionality 6. IAIS Application Papers should be read in the context of the proportionality principle, as described in the Introduction to ICPs: “Supervisors have the flexibility to ta ilor their implementation of supervisory requirements and their application of insurance supervision to achieve the outcomes stipulated in the Principle Statements and Standards.” 4 When reading the advice, illustrations, recommendations and examples of good practice provided in this Paper, it is important to keep proportionality in mind. Where appropriate, this Paper provides practical examples of the application of the proportionality principle. 1.4 Terminology 7. In this Application Paper, all terms have the same meaning as set out in the IAIS Glossary and the Introduction to the ICPs. To facilitate the understanding of the Paper, definitions of terms that are used frequently and are not part of the IAIS Glossary, are shown in the table below. Table 1: List of climate-related terms Term Definition Climate The warming of the world’s climate system, including its atmosphere, change oceans, and land surfaces. Sustainability Risks associated with environmental, social or governance (ESG) risk factors. Climate-related and other environmental risks are a subset of sustainability risks. Climate- Risk posed by the exposure of an insurer to physical, transition and/or related risk / liability risks caused by or related to climate change. climate risk These terms are used interchangeably in this Paper. Environmental Risks posed by the exposure of an insurer to activities that may risk potentially cause or be affected by environmental degradation.  Liability risk The risk of climate-related claims under liability policies, as well as direct actions against insurers, for failing to manage climate risks. Physical risk Risk arising from increased damage and losses from physical phenomena associated with both climate-related trends (eg changing weather patterns, sea level rise) and events (eg natural disasters, extreme weather). Transition risk Risk arising from disruptions and shifts associated with the transition to a low-carbon economy, which may affect the value of assets or the costs of doing business. 1.5 Scope 8. Climate-related risks may affect the supervision of insurers in many ways. Therefore, an Application Paper on this topic could theoretically deal with a great number of ICPs. For the purpose of focusing the content of the Paper, the following ICP topics are in scope: ICP 9 (Supervisory Review and Reporting); ICP 7 (Corporate Governance); ICP 8 and 16 (Risk Management); ICP 15 (Investments); and ICP 20 (Disclosures). 9. The ICPs listed above all contain ComFrame standards ( Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs)), with the exception of ICP 20. ComFrame builds on, and expands upon, the high-level standards and guidance set out in the ICPs. The ICPs generally apply to the insurance sector as a whole, both on a legal entity and group-wide level, and both to primary insurers and reinsurers. The primary aim of this Paper is to provide guidance for supervisors in implementing the ICPs. 10. The SIF and IAIS recognise that several ICPs, not in scope for this Paper, do have relevance for assessing and mitigating climate-related risks. These may be covered in future work, or are already covered by other work and include: ICPs 14 and 17 (Valuation and Capital requirements): Since ICPs 14 and 17 are scheduled to be revised in the coming years (during the monitoring period of the Insurance Capital Standard Version 2.0), developing an Application Paper related to these ICPs at this time would not be appropriate; ICP 19 (Conduct of business): Conduct of business is especially relevant in terms of possible reputational risk and the risk of “green washing”. 5 Inclusion of ICP 19, however, does not naturally fit with the other identified topics, which instead all relate to prudential supervision. For the purpose of this Paper, it is therefore out of scope; and ICP 24 (Macroprudential supervision): Climate change has system-wide implications. Supervisory (macroprudential) stress testing is one tool to measure the potential impact of climate change on the insurance sector as a whole. At the time of this Paper’s development, the IAIS is also developing an Application Paper specifically dealing with ICP 24; therefore, this ICP is not in scope. That Paper provides examples of the various 5 Greenwashing refers to the process of conveying a false impression or providing misleading information about how a company's products or services are more environmentally sound, eg spending more on the marketing around it than on actually reducing its environmental impact.  macroprudential tools that a supervisor may use, many of which are helpful to assess climate-related risks. 11. Another important area not in scope relates to the availability and affordability of insurance due to an increase in weather-related events and natural catastrophes. To reduce its exposure to climate-related risks, an insurer may take a number of actions, including to: stop offering insurance to a certain group of policyholders; significantly increase premiums; lower policy limits; or exclude cover for specific perils and/or promote risk reduction measures by policyholders. While justifiable from a microprudential perspective, some actions taken may potentially introduce undesirable socio-economic results in the near-term. New forms of public- private partnerships are emerging that can help jurisdictions absorb the financial consequences of catastrophic weather-related events. Supervisors can act as a bridge and communication catalyst between policymakers, the insurance industry and consumers. Bodies such as the Insurance Development Forum (IDF) and the Access to Insurance Initiative (A2ii) are actively engaging insurers and supervisors in this area.6 2 Role of the Supervisor 12. As noted in the Introduction, climate-related risks are a source of financial risk, which may translate into prudential risks to insurers – ie may affect the resilience of insurers (see Table 2). It is recommended that supervisors assess the extent to which climate-related risks are likely to be material to insurers operating in their jurisdiction and to determine how these risks may be transmitted to their economies and financial sectors more broadly. 7 Supervisors should identify how climate-related risks are relevant to their supervisory objectives. In recent years, some supervisors have expanded their objectives to include sustainability. Table 2: Climate-related risks and selected prudential risks Prudential risks Potential impact from climate change Investment risk The value of an insurer’s investment portfolio may be affected if invested in sectors or assets, which may be at risk from either physical or transition-related factors. Liquidity risk A lack of reliable and comparable information on climate-sensitive exposures could create uncertainty and cause procyclical market dynamics, including fire sales of carbon-intensive assets, and hence reduce liquidity of these markets. In addition, the uncertainty in future experience that may result from climate change could lead to a volatile claims experience. This may, in turn, lead to inadequate liquid resources and the potential need to dispose of assets on unfavourable terms. Operational risk Physical climate impacts may affect the insurer’s own assets (including property, equipment, IT systems and human resources), leading to increased operating costs, inhibited claims management  capacity, or potentially stoppages of operations. It may also impact outsourced activities. Reputational risk Negative publicity may be triggered by insurers underwriting, or investing in, sectors perceived as contributing to climate change. This is exemplified by social movements calling for divestment from fossil fuels and the cessation of underwriting of coal-fired power infrastructure. Further, reductions in affordability or availability of insurance cover as insurers respond to climate risk may also lead to negative reputational impact, for instance if insurers are perceived to increase prices substantially or withdraw coverage to certain counterparties without there being an appropriate alternative. Strategic risk Physical or transition-related climate events, trends and uncertainty about future scenarios may present strategic challenges to insurers, which could inhibit or prevent an insurer from achieving its strategic objectives. Underwriting risk Climate change increases the frequency, severity and concentration of weather-related insurance claims, as well as the level of variability. If the impact of climate change is not properly accounted for, underwriting may underestimate the risks to which an insurer is exposed in writing a particular insurance policy. Additionally, liability policies may also give rise to prudential impacts through underwriting risk. Sources: 2018 IAIS/SIF Issues Paper and Network for Greening the Financial System (NGFS) (2020). 2.1 Preconditions and resources 13. As highlighted in the ICP Assessment Methodology,8 an effective system of insurance supervision requires a number of preconditions to be in place. Although normally outside the control or influence of the supervisor, such preconditions can be taken into account in the development of supervisory practices as they relate to climate -related risks. The following categories of preconditions may be of particular relevance: Sound and sustainable macroeconomic and financial sector policies, eg the introduction of a globally-agreed carbon pricing system; A well-developed public infrastructure, eg the existence of levees against rising sea levels as part of adaptation programmes, or the existence of strong building codes that facilitate sustainable structures; Efficient financial markets, eg the adoption of a globally accepted framework for sustainability standards; or Effective market discipline in financial markets, eg the extent to which non-financial private sector participants have implemented climate-related disclosures, and the existence of independent sustainability ratings that are comparable, reliable and accessible.  Know who is responsible for managing them in the institution; Understand their impact within the institution's specific context, and to be able to cite examples; Be able to formulate a strategy and policies to tackle them; Take responsibility for ensuring their adequate management; In the case of supervisory Board members: to monitor their adequate management; and Have sufficient relevant competencies, such as a helicopter view, leadership, autonomy, sensitivity to their environment, strategic guidance and sense of responsibility. The actual assessment will be proportionate, taking into account the candidate's position, the institution's nature, size, complexity and risk profile, and the composition and functioning of the Board as a whole. More information can be found on DNB’s “fit and proper” assessments website under the heading Climate-related risks are now part of fit and proper assessments. United Kingdom The UK PRA stipulates the following expectations for insurers and reinsurers to address financial risks from climate change through their risk management frameworks. 14 It is expected that insurers and reinsurers should understand the financial risks from climate change and how they will affect their business model. To do so, they should: Develop scenario analysis and stress testing, using all possible data in addition to historical data (eg future trends in catastrophe modelling) to identify correctly the short- and long-term financial risks to their business model from climate change; Develop quantitative and qualitative tools to monitor their exposure to financial risks from climate change exposure (eg monitor the potential impact of physical risk factors on outsourcing arrangements and supply chains) and to monitor progress against their overall business strategy and risk appetite; and Define a credible plan or policies for mitigate and managing the exposures to financial risks from climate change (eg any action to reduce the concentration of these risks such as the necessity to take into account the potential and future impacts of the physical and transition risk factors on their clients, counterparties, and organisations in which the firm invests or may invest). 5 Enterprise Risk Management for Solvency Purposes 53. ICP 16 (Enterprise Risk Management for Solvency Purposes) sets out supervisory expectations of how insurers coordinate their risk management, strategic planning and capital management processes. This section discusses how climate -related risks should be integrated in an insurer’s underwriting policy and underwriting processes, as well as in the Own Risk and Solvency Assessment (ORSA) process (with a focus on stress testing and scenario analysis). This covers Standards ICP 16.2, 16, 7 and 16.10 – 16.14. ICP 16 also covers areas relating to the insurer’s ALM and investment policies, which is covered in section 6. Box 3 provides examples of supervisory practices around ORSA and stress testing. 5.1 Underwriting policy 54. Physical, transition and liability risks arising from climate change can impact the business risk profile, underwriting strategy and underwriting processes of insurers. When material, supervisors should expect insurers to identify the relevant physical, transition and liability risks inherent in their business portfolios, assess the implications for their underwriting strategy, and develop policies and procedures to integrate the management of these risks as part of their enterprise risk management (ERM) framework as well as the risk appetite statement. 55. Insurers should consider both the short-term and longer-term (including both business planning horizon and duration of the policies) when assessing the impact of such risks. How insurers consider the climate-related risks within underwriting risk is likely to be dependent on various elements (eg duration of the contract, frequency and severity of climate events, localisation of the goods and persons covered, impact of perils on their policies, reinsurance agreements, terms and conditions). 5.1.1 Consideration of climate-related risks in the underwriting policy 56. Insurers should have internal guidance on howthe assessment and monitoring of such risks are embedded in the underwriting process. Hence, supervisors should require insurers to incorporate the consideration of climate-related risks in the underwriting policy, as appropriate, given the exposure of their individual products to those risks. This may include the description of: Geographical areas, economic sectors15 or lines of business that are assessed to have higher climate-related risks; Processes to identify and assess material climate-related risks inherent in new business applications and in the in-force portfolio; and The use of climate research reports, climate risk models and other analytics tools in the underwriting decision-making process, where applicable. 5.1.2 Consideration of climate-related risks in the underwriting assessment 57. Insurers strive to understand the potential losses from natural catastrophe events through their use of natural catastrophe modelling and analytical tools. It is possible that over time, insurers will also have a more precise understanding of the physical risks of climate change. However, this requires that sufficient data becomes available to incorporate climate change scenario analysis into their catastrophe models, which would allow for the estimat ion of both the likelihood of events as well as the associated potential losses. 58. The integration of climate-related risks in the underwriting assessment may involve the enhancement of underwriting practices due to the need to consider the relevant liabili ty, transition and reputational risks. For material risks associated with climate change, supervisors should encourage insurers to include, as relevant, their assessment as part of their overall underwriting assessment for each policyholder. Where relevant, the underwriting assessment should be enhanced to consider:16 The track record and commitment of the policyholder in managing climate -related risks;17 The ability and willingness of each policyholder to mitigate the identified climate -related risks associated with the transaction; The duration of the policy; and The need to impose underwriting conditions for certain types of products 18 to require policyholders that are assessed to pose higher risks due to their climate impact to take steps to mitigate those risks. 59. Insurers may choose to use ratings developed by external parties or develop their own risk assessment methodology to incorporate climate -related risks in the underwriting assessment. If an insurer relies on external ratings, it should ensure that t he rating methodology is sufficiently transparent to allow understanding of the ratings provided. For transactions that are assessed to involve higher climate -related risks, it may be appropriate for supervisors to expect insurers to perform additional due diligence procedures 19 to obtain a more informed understanding of the risks associated with the transaction. It may also be appropriate for insurers to incorporate climate-related risk exposures into the underwriting authority grid, such that transactions that are assessed to involve higher climate-related risks require internal escalation for approval. 5.1.3 Monitoring of underwriting exposure to climate-related risks 60. Climate change is already causing changes to the frequency and severity of loss events for some perils, which in turn may increase the risk profile of an insurer’s business portfolio. For instance, climate change could result in changes in weather patterns that may impact non-life products as a result of the increase in physical risks of certain geographical areas, but will also increase the air temperature that could result in a longer-term impact through the increase in mortality and morbidity risks. Additionally, certain non-life policies may face increased liability risks as a result of evolving legal approaches and increased litigation linked to climate-related risks. 61. Hence, supervisors should encourage insurers to develop appropriate tools and metrics to monitor their underwriting exposures to climate -relatedrisks. Such tools and metrics may be used, for example, to monitor underwriting exposures to and concentrations in geographical areas or sectors that are assessed to pose higher climate -related risks (such as peril regions). This would enable insurers to take appropriate mitigating measure s to manage any potential build-up in concentration of exposures to geographical areas or sectors with higher climate-related risks. 5.2 Own Risk and Solvency Assessment (ORSA) 62. The unique business strategy, investment portfolio and risk profile of each insurer will affect the degree of impact arising from climate-related risks. The nature and materiality of the relevant insurance, credit, market, concentration, operational and liquidity risks will vary depending on the exposure to climate change of each insurer. Hence, the ORSA is a particularly useful tool for insurers to assess the adequacy of their ERM and capital position. Supervisors should expect insurers to consider all material physical, transition and liability risks arising from climate change in its ORSA process, and adopt the appropriate risk management actions to mitigate the identified risks accordingly. Insurers may consider the risks on both a qualitative and quantitative basis, with the understanding that quantitative capabilities should improve over time as the ability to access the necessary data is improved. 63. As part of the ORSA, the insurer assesses its risk management and financial resources over a longer time horizon than used to determine regulatory capital requirements. The time horizon should be consistent with the nature of the insurer’s risks and business planning. Some climate-related risks may take longer to fully materialise and, therefore, it would be expected that the ORSA also include appropriate scenarios that use a more extended time horizon, where relevant. When assessing the appropriateness of time horizons used by insurers, supervisors should consider the nature and types of business written by the insurer. 5.2.1 Stress testing and scenario analysis of climate-related risks 64. As part of the ORSA, an insurer is required to perform a continuity analysis to assess its ability to manage its risks and meet its capital requirements under a range of plausible adverse scenarios with a forward-looking perspective in mind. When material, this analysis should include the identification and assessment of the direct and indirect impact of climate - related risks. For instance, including as part of the scenario analysis a (reverse) stress testing process. This would enable insurers to assess their resilience to financial losses with respect to climate change. This process should incorporate an assessment of physical, transition and liability risks: Assessment of physical risks includes the use catastrophe modelling including a number of different scenarios (eg 1-100 to 1-500 or 1-1000 year events). This may also include the identification of a climate-related risk scenario that could potentially cause insolvency; Assessment of transition risks may cover how increases in carbon taxes, stricter environmental regulations and a low-carbon economy would impact both assets and technical provisions; and Liability risks assessment involves the risks resulting from potential changes in societal, litigation and judicial environments. Insurers offering claims-made policies should have an understanding of the potential impact on their liability risks as a result of increasing pressure on Boards to manage their companies in a responsible manner, especially as it relates to the environment, and should consider appropriate exclusions and/or limits. 65. Parameters and assumptions for climate-related stress testing scenarios may be adopted from modelling work performed by meteorological agencies, regulators or other external experts. For example, there are statistical models to determine the frequency of flooding events, and modified economic models to estimate the economic or financial impact of various climate shocks. Alternatively, insurers may have developed internal models for the impacts of climate risk. Supervisors should encourage insurers to use models that are pertinent to their geographical scope and nature of business. It is important for insurers to fully understand these models, the uncertainties of the results and their underlying assumptions and methodologies when deciding on their relevance. 66. Climate-related risks are material to the insurance industry and are expected to potentially have an impact on all insurers; therefore, these risks should be considered for inclusion in the ORSA. If climate-related risks are assessed to be immaterial by an insurer, the insurer should document the reason for the assessment. The rationale for immateriality could be included in the documentation that summarises the risks that the insurer considered for incorporation in the ORSA and may be concise. Box 3: Examples of supervisory practice on ORSA and stress testing Canada In Canada, certain IAIGs have included a climate risk scenario in stress testing in the last two years. In 2019, this included both first-order impacts (loss of value in physical assets in high-risk flooding regions) and second-order impacts on the asset portfolio due to a shift to green industries and reduced market value of securities related to fossil fuels businesses. Furthermore, in 2021, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) will undertake a pilot project to use climate -change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors will participate voluntarily in the project. Participants will be asked to explore the potential risk exposures of their balance sheets to climate-change scenarios that are relevant for Canada. A report is planned to be published end 2021. Chinese Taipei The Financial Supervisory Commission (FSC) has required insurers to assess the impact of climate change in the 2020 ORSA Supervisory Report, including risk identification of climate change, major risk exposure status, risk assessment methods and related response strategy. The FSC requires insurers to identify and assess the aspects of climate change and the degree of impacts, including physical risks, transition risks and liability risks, in the 2021 ORSA Supervisory Report. The insurers should disclose the difficulties, limitations and challenges faced by the insurers when they conduct climate change risk management. Also, the ORSA Supervisory Report should include the related re sponse strategies to climate change risk management. Regarding the stress test, in addition to the existing scenarios of catastrophes, the FSC has adding climate change scenarios, including the associated losses related to typhoons, into the current overall stress test scenarios to assess the impact on insurers and other associated losses. The Netherlands