Companies within the insurance sector frequently performed scenario analysis and stress testing to better understand their risk profile. Scenario analysis was also mentioned more frequently by top-performing insurers when compared with other sectors, as this is already conducted to some degree to set insurance premiums. However, limited information existed on the modeled climate scenarios and their impacts. The methodologies of some of the analyses appeared to be based on historical trends, which omit the impacts of climate change. Also, in some cases the analysis was limited to investment portfolios and not insurance products.
High-performing insurance companies reported that they would commence scenario analysis in the coming year. Some insurers focused their strategic disclosures on the management of Scope 1 and 2 GHG emissions and becoming carbon neutral, although direct emissions are not seen as the key risk for companies in the sector. In the UK market, it is likely the insurance sector will see an increase in the strategy score because of the 2019 guidance issued by the Prudential Regulation Authority for the UK insurance industry.
For the insurance sector, the risk management disclosures were 10 points lower for both coverage and quality scores when compared with the banking sector. Despite this difference, the risk management disclosures, together with the metrics and targets, was the highest scorer in the sector.
Most risk management disclosures discussed how climate change fits within the enterprise-wide risk management frameworks. Those with higher-quality disclosures have specific climate committees to oversee the management of physical risks on insurance products — and to manage changing premiums and product offerings.
Where insurers discussed the management of transition risks to their investment portfolios or the management of their own emissions, these issues were generally handled by separate groups at the operational level. Several insurers disclosed an explicit withdrawal of support for the fossil fuel sector. Despite disclosure of physical risks improving when compared with the previous year, only a limited number of insurers disclosed how they planned to manage physical risks, leaving much room for improvement.
Targets and metrics
A limited number of insurers set robust targets and metrics for climate risks that were aligned to physical and transition risks.
The TCFD Annex report recommends that insurers should also provide metrics and targets relating to aggregated risk exposure for weather-related catastrophes. Scope 1 and 2 GHG emissions were commonly disclosed by the insurers; however, the majority of the insurers did not disclose whether they monitored the carbon intensity of their underwriting or investment portfolios. Scope 3 emissions, targets and historical trend disclosures were rarely revealed. Where targets were disclosed, they related back to Scope 1 and 2 GHG emissions. There was no disclosure of targets and metrics specifically addressing physical risks.
The lower coverage and quality scores for metrics and targets was recognized by top-performing insurance companies with the development of metrics and targets commonly listed as an action item in their climate change action plan.