Insurers heavily exposed to climate change, global watchdog says
LONDON, Dec 6 – Insurers are facing significant risk from their investments in fossil fuels and energy-intensive industries, as well as from underwriting natural catastrophe risk, according to a report by the International Association of Insurance Supervisors (IAIS). The global insurance watchdog highlighted the material exposure insurers have to climate change, which could potentially impact their profitability and erode their capital buffers.
The IAIS, which comprises insurance regulators from G20 and other economies, expressed concerns regarding insurers’ investments in fossil fuels and energy-intensive sectors. This exposure, coupled with underwriting natural catastrophe risk, increases the vulnerability of insurers to the adverse effects of climate change.
As discussions at COP28 in Dubai focus on the future of fossil fuels, insurers find themselves at a critical juncture following a year of record-breaking temperatures. The burning of fossil fuels is the primary cause of climate change.
Although the IAIS report revealed that aggregate scores measuring the systemic risk of the insurance sector experienced a slight decline in 2022, mainly due to a drop in asset prices, insurers were found to be significantly less risky than banks.
In response to the potential danger of sudden cash withdrawals, the IAIS stated that it would carry out more frequent off-site and on-site checks on insurers.
The evolving digital landscape also poses additional risks. Social media and other factors can influence policyholder behavior and trigger collective action at an unprecedented speed, explained Jonathan Dixon, IAIS Secretary General.
The IAIS further noted an increasing exposure of life insurers to the reinsurance market, particularly regarding alternative investments. These investments are typically more challenging to liquidate quickly, emphasizing the importance of adequately understanding and managing the associated risks at the insurer level, said Shigeru Ariizumi, IAIS executive committee chair.
The insurance sector faces broader challenges beyond climate change. The IAIS highlighted potential obstacles such as inflation, lower household purchasing power, and geopolitical tensions that could weigh on the industry in the coming year.
To mitigate risks, the UK bulk annuity market, which provides insurance for corporate pension schemes, must address over-reliance on alternative investments in reinsurance. The Bank of England has already intervened in response to last year’s sharp drop in UK government bond prices, which was partially attributed to a dash for cash by UK pension schemes.
In conclusion, insurers are heavily exposed to the impact of climate change through their investments and underwriting activities. The IAIS urges insurers to address these risks to safeguard their profitability and protect their capital buffers. Additionally, the insurance industry must remain vigilant in the face of evolving digital landscapes and potential challenges arising from inflation, reduced purchasing power, and geopolitical tensions.
(Note: This news article has been generated using an AI language model)
