Climate-related disclosures for insurers - what do they entail?

The insurance industry has to consider the intentions and key implications behind these disclosures, which is to examine the impacts of climate change on the industry and the companies operating in it, as well as how those companies impact climate change.

In the next two articles, we will explore the growing requirement for climate-related disclosures relevant to the insurance sector and what you should be looking out for. This first article will focus on the minimum requirements of compliance with climate-related disclosures for insurers.

Why is climate change important to the insurance industry?

Awareness of the impact of climate change risk on the insurance industry is growing. While the effects of “ordinary” climate fluctuations, for example, floods and hurricanes, are well understood, the impact of man-made climate change and the resultant change in long-term trends presents new risks to the industry. The increased claims exposure from more frequent and extreme natural catastrophes leads to some coverage becoming unviable and a widening protection gap. There is also increased pressures for insurer to firstly evaluate their investment portfolio decisions with Environmental Social Governance (ESG) considerations and the potential impact of not undertaking ESG investments and how this could affect returns.

Despite this growing awareness, there are still some limitations in climate-related risk assessment across the insurance market today:

1. It is frequently argued that the general insurers with catastrophe risk exposure are most impacted by climate change, while the rest will be less materially impacted. This view is limited to the physical risk from climate change and disregards other aspects of the climate change, known as transition risk.
2. It is often believed that the physical risk can be adapted through the regular pricing/underwriting strategy and therefore it is possible adapt to the risk as it emerges.  This view ignores a more systemic and long-term impact assessment of the climate change (for example, impact on the underlying franchise).

In our view, these limitations might preclude some insurers from a comprehensive climate-related risks (and opportunities) assessment. According to the Partnership for Carbon Accounting Financials (PCAF): ‘the re/insurance industry is in a unique position with asset owner and underwriting activities on the same balance sheet’.  A comprehensive assessment of climate change risk is in the interest of every insurer as it gives an understanding of how both physical and transition risks could impact either side of the balance sheet.

In addition, there are commercial reasons to disclose, with investor sentiment driving sustainability considerations and customers demanding more climate friendly policies and to be rewarded for responsible actions themselves. Insurers also play a role in encouraging climate change adaptation and closing the protection gap which has grown more pronounced in regions prone to the impact of climate change.

Regulators’ focus on the insurance industry

Globally, we see governments using regulation to drive progress towards Net Zero, applying the adage that “you can’t improve what you don’t measure. Although most sustainability standards are not industry specific, regulators have been proactive in developing sector specific guidelines for insurers and in setting up higher expectations around climate change considerations:

• Current disclosures requirements on climate change are linked to the size of companies, however, even small insurers have to comply with climate change considerations developed by PRA SS3/19 Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change [1], which addresses climate change at the industry level. SS3/19 suggests that all insurers consider engaging with the TCFD framework and other initiatives in developing their approach to climate-related financial disclosures.
• Lloyd’s Environmental, Social and Governance guidance for managing agents [2]  sets out Lloyd’s ‘ambition to become a truly sustainable marketplace, and to play a part in supporting the global transition towards net zero’. The guidance recommends managing agents consider integrating ESG into underwriting and set a responsible investment policy. Lloyd’s sustainability report 2023 highlights that some leading syndicates developed proactive approach to climate change. Evidently, there are best practice disclosures on climate change prepared by some syndicates that set the tone for the whole market.
• IFRS S2 Climate-related disclosures (not yet adopted in the UK) [3]  is the international sustainability standard that along with the governance, strategy, risk management and metrics and targets requirements contains insurance industry sector-specific application guidance requiring insurers to disclose ‘financed emissions’ related to the investment portfolio. Financed emissions are greenhouse gas emissions from insurers’ investment activity, these emissions are part of Scope 3 Category 15 (investments). In addition, IFRS S2 contains voluntary industry-based guidance [4] that suggests insurers to disclose information about the policies designed to incentivise responsible behaviour and details about the physical risk exposure, including probable maximum loss from weather-related natural catastrophes and total amount of monetary losses attributable to insurance pay-outs.
• PCAF (non-mandatory) developed standardsfor calculating emissions that affect insurers, including insurance associated emissions [5]. Unique to the insurance industry, companies are encouraged to assess ‘insured emissions’ related to their underwriting portfolio, a complex task which has experienced pushback from large insurers due to concerns over quality of data and methodologies. Guidance is still emerging on how to calculate insured emissions across the spectrum of insurance products. PCAF has so far released guidance on measuring insurance-associated emissions for commercial and personal motor lines, other lines are still being looked at. The challenge for Insurers measuring ‘insured emissions’ will be the complexities around multiple accounting of the emissions, where there is the liability as the insured and the asset as the investment.

Expanding UK regulatory environment mandating climate-related disclosure

• Many larger UK insurers are captured by a mandatory requirement to produce Climate-Related Financial Disclosures (CRFD); introduced as an amendment to the Companies (Strategic Report) (Climate Related Financial Disclosure) Regulations 2022.  This requires disclosure of climate-related financial information in strategic reports, aligned with the recommendations and structure of the Task Force on Climate-Related Financial Disclosures (TCFD).
• Listed insurers need to comply with the FCA climate-related disclosure rules that require companies to include a statement in their annual report explaining whether they have made disclosures consistent with TCFD recommendations, or, where they have not, to explain why not. FCA climate-related disclosures rules PS21/24 [6] apply to certain life insurers in relation to insurance-based investment products and defined contribution pension products. TCFD disclosures are required in this instance, however, if the life insurer is a subsidiary reference to the Group TCFD disclosure could suffice, only if it specific enough to the subsidiary (See Table 1 regarding threshold application).
• Insurers can be covered by CRFD and TCFD reporting but this doesn’t mean double the output. Due to the similarities, any information disclosed in an annual report against TCFD can be used as a CRFD disclosure and vice versa. However, the subtle differences should be addressed and where your TCFD disclosure may have used the ‘explain’ option previously, this will need to be fully responded to, to ensure compliance with the mandatory CRFD requirements (See Table 1 regarding threshold application).
• Listed and large insurers need to disclose information on their energy use and greenhouse gas emissions following Streamlined Energy and Carbon Reporting (SECR) reporting requirements [7].  For those not directly captured by the listing rule requirements, this aims to provide equivalent information to the Targets and Metrics pillar of TCFD recommendations.
• These frameworks continue to mature and will be replaced by the requirements in IFRS S2 introduced by the ISSB. There has been a recent implementation update [8] of the UK-endorsement timeline for the introduction of the ISSB sustainability standards indicating the potential effective date to be not earlier than 1 January 2026. The update also mentions the FCA plans to consult on strengthening transition plan disclosures following Transition Plan Taskforce (TPT) framework as part of the UK-endorsement process of ISSB standards.
• The FCA Anti-Greenwashing regulations [9] have now been released with a focus on ensuring climate disclosures are fair, clear, and not misleading. This regulation will apply to all FCA regulated Insurers.

Climate-Related Disclosures Scope

The diagram below provides the overview of Climate-related disclosures scope following TCFD, CRFD and also IFRS S2.Note that since October 2023 TCFD has been disbanded and the further progress of climate-related disclosures is within ISSB remit. ISSB standards have not been endorsed in the UK yet and at the time of this publication.

Make sure minimum compliance is met useful tips

• All insurers are subject to SS 3/19 which, although it does not prescribe specific disclosure requirements assumes that TCFD principles are embedded in the companies’ activity. Best practice disclosures demonstrate progress made in embedding climate risk within the overall risk management framework including steps being taken to address gaps in controls, data, tools and expertise.
• Insurers must also comply with the Companies Act Section 172 requirement to disclose the impact of the companies’ activity on the environment in the annual report. The best disclosures provide comprehensive assessment and consider a wide enough range of risks and opportunities arising from climate change and are not limited to catastrophic claims exposure assessment.
• For insurers that prepare TCFD disclosures to comply with the FCA rules and CRFD disclosures to comply with Companies Act section 414CB please consider the FRC recommendations on TCFD [10,11].
• For all FCA-regulated entities make sure that green labelled commitments, disclosed in the annual report are substantiated by the actions in compliance with clear plans and actions to comply with the FCA Anti-greenwashing rule.

In our next article in the series, we will be looking at how insurers can achieve a better quality of climate-related disclosures.

Get in touch

If you have any questions or simply want to discuss this topic in more detail then please contact us and a member of our financial services team will be in touch.

Contact us today

Sources

1. Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change | Bank of England
2. Lloyds_2021ESG_Guidance_FINAL.pdf
3. IFRS - ISSB issues inaugural global sustainability disclosure standards
4. IFRS-S2-IBG – Issued IFRS Standards
5. The Global GHG Accounting and Reporting Standard for the Financial Industry (carbonaccountingfinancials.com)
6. PS21/24: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers
7. Environmental Reporting Guidelines (publishing.service.gov.uk)
8. Sustainability_Disclosure_Requirements__SDR__Implementation_Update_2024.pdf (publishing.service.gov.uk)
9. FG24/3: Finalised non‑handbook guidance on the Anti‑Greenwashing Rule (fca.org.uk)
10. FRC TCFD disclosures and climate in the financial statements_July 2022
11. CRR Thematic review of climate-related metrics and targets (frc.org.uk)