The article shows which are the three ways the industry is influenced by the climate change: it creates new risks that need to be covered, it increases the costs of traditional claims arising from climate events, and via so-called "stranded assets" (unrecoverable because they are linked to fossil fuels), it affects the value of assets that are used to cover liabilities.
The Solvency II Directive requires insurers to assess all the risk factors to which they are exposed over the short and long term. This applies even where these risk factors are poorly captured by the standard formula, which is used by most insurers to quantify their solvency capital requirements (SCR). At the very least, insurers must include climate change risks in the forward-looking Own Risk and Solvency Assessment (ORSA) they are required to carry out every year, as EIOPA, the European insurance supervisor, reiterated in September 2019.
To clarify these requirements, the revised version of the Solvency II Directive should lead to climate risk being expressly rather than implicitly included in the regulation of the sector, particularly in insurers' ORSAs and their solvency assessments.
Insurers have not sat idly by and waited for the regulators to address the issue of climate action. They have already been covering the surging costs of climate events such as windstorms, floods and droughts, and they require policyholders to take appropriate preventative measures. However, while it is clear that insurers are playing an active part in addressing climate change as the underwriters of climate risks, most action is probably expected of them on the investment front because that is where they can have the most significant climate impact.
You can find more about the climate action on the insurance industry by accessing the article here.
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