On 5 November 2019, the Dutch Central Bank (De Nederlandsche Bank, DNB) published a Q&A and good practice document addressing how insurers should take into account climate-related risks in their Own Risk and Solvency Assessment (ORSA) under Solvency II.
In the Q&A, DNB indicates that insurers are required to take into account climate-related risks in their ORSA, as the ORSA must be forward-looking and cover the risks to which the insurer is or could be exposed, taking into account potential future changes in its risk profile resulting, among other things, from the economic and financial environment. Given the potential impact of climate-related risks on both the asset side of the balance sheet and the technical provisions, DNB expects insurers to include climate-related risks in their ORSA by analysing and describing the impact of these risks on their risk profile. DNB expects a presentation and explanation of the results of this analysis in the ORSA report. If the analysis shows that climate-related risks are not considered material – for example because the insurer is not or could not be exposed to these risks – DNB expects to see this reflected in the explanation.
DNB indicates that climate-related risks for the insurance sector can be subdivided into physical risks and risks arising from the transition to a climate-neutral economy. Both risks can translate into financial risks and therefore have consequences for insurers. Both transition risks and physical risks can materialise on the asset side of an insurer’s balance sheet (regardless of the insurer’s exact activities):
- Changed weather conditions can have physical consequences. For example, damage to (collateral in) real estate or a downward revaluation of companies whose assets are exposed to the physical effects of climate change.
- A new climate policy set by the government (with possible new regulations and stricter standards), technical developments and / or a change in consumer preferences can influence the market value and creditworthiness of companies. For example, the risks arising from the transition to a climate-neutral economy can lead to a write-down of loans to and investments in companies.
The impact of climate-related risks on the liabilities side of an insurer’s balance sheet is highly dependent on the products offered by the insurer concerned. In particular non-life insurers may be directly affected by climate-related risks in the form of increasing claims (claims), as a result of climate change and deviating weather patterns, such as extreme rainfall or flooding.
Life insurers, funeral services insurers and health insurers can be confronted with changing patterns in claims due to a changing climate, for example due to an increase in (less known) tropical diseases in Europe and an increasing chance of heat waves or natural disasters resulting in casualties.
The good practice document published by DNB provides guidance on how insurers should work out these risk scenarios and take them into account in their ORSA.
View the Q&A (Dutch only), 5 November 2019.
View the good practice document (Dutch only), 5 November 2019.