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Supervisors urged to step up climate risk analysis

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Industry supervisors warn data gaps and myopic financial and regulatory risk models make it difficult for insurers to develop scenario analyses for climate change risks long term.

An issues paper from the International Association of Insurance Supervisors and the Sustainable Insurance Forum says select groups are undertaking scenario analysis to see how their investment portfolios may be affected by various changes.

However, inadequate data and methodological gaps make it difficult to assess how asset classes such as corporate bonds will behave.

Insurers can be exposed to transition risk in high-emissions sectors through their corporate bond investments.

The paper warns long-term risks and impacts may materialise beyond the financial risk model used by institutions, and beyond supervisory time horizons.

A Dutch central bank survey on transition risk, conducted last year, found different classification systems used by different companies across different asset classes made collating transition risk exposures challenging at a systemic level, the paper says.

By conducting their own system-level scenario analyses, supervisors can complement their view of a business’ climate risks and encourage companies to build their capacities to evaluate transition risks, the paper says.

Supervisors can seek ways to undertake longer-term risk exploration. They should develop capabilities to accurately evaluate what the insurance sector is doing to achieve climate resilience across underwriting and investment activities, the paper says.