The Central Bank has urged insurance firms to safeguard themselves from potential risks stemming from the climate crisis, which could put the financial stability of insurance providers at risk.
Outlining their Guidance for (Re)Insurance Undertakings on Climate Change Risk report today, the regulator made it clear that events like natural disasters may challenge traditional business models of insurers and make it more difficult to provide accessible insurance.
Sharon Donnery, the Central Bank’s deputy governor, declared that “ensuring the financial system is resilient to climate-related risks and incorporating climate change considerations across our own operations are strategic priorities for the Central Bank.”
The report also highlighted that only 20% of insurers fully integrate climate change risk into their management plan, and less than half of them utilize any form of scenario analysis or stress testing.
The Central Bank issued a warning, advising insurance companies to particularly pay attention to prolonged, clustered or repeated events that could influence the availability of insurance, not just for businesses but also homes.
Illustrating the seriousness of the problem, Crossmolina, a village on the west coast of Ireland, has experienced countless floods that have caused insurance costs to skyrocket.
To future-proof their operations, the Central Bank advised insurance firms to consider short, medium, and long-term climate change scenarios, which span 10, 30, and 80 years respectively.
Physical risk drivers may encompass the geographic location of assets, the influence of natural catastrophes on the underwriting portfolio, as well as mortality and morbidity in the future.
Transition risk drivers may include investments in companies dependent on fossil fuels, changes in the risk profile of businesses, litigation-related claims, and potential reputational risks.
