A new report released today by the Ceres Accelerator for Sustainable Capital Markets and the California Department of Insurance reveals that insurance companies are pursuing a wide variety of strategies to manage the increasing risks associated with climate change.
Climate Risk Management in the U.S. Insurance Sector: An Analysis of Climate Risk Disclosure, is the first comprehensive review of U.S. insurance companies’ climate risk strategies. The findings are based on an examination of nearly 500 publicly available insurance company responses to the National Association of Insurance Commissioners’ (NAIC) 2021 Climate Risk Disclosure Survey, which implemented Task Force on Climate-related Financial Disclosures (TCFD) recommendations for the first time.
The TCFD framework is a global standard used by thousands of companies worldwide and insurance regulators in France, Switzerland, and the United Kingdom. The U.S. Securities and Exchange Commission is using the TCFD framework as the basis for their proposed climate disclosure rules. The survey includes sections on governance, strategy, risk management, investments, and metrics and targets, requiring companies to measure their progress toward reducing climate risks across all areas of their business.
The report points the way for insurance companies and regulators to expand their climate reporting and consider new approaches to managing climate risks. This year, 27 states are participating in the NAIC Climate Disclosure Survey, the largest participation ever. It covers 80% of the U.S. insurance market.
In addition to response analysis, Ceres commissioned consultant Manifest Climate to measure TCFD-alignment using an innovative new machine learning algorithm.
“Insurance companies face enormous and rapidly growing risks from climate-related disasters. This report shows the important progress they are making to account for these risks, but there is still more work that can be done,” said Steven Rothstein, managing director for the Ceres Accelerator for Sustainable Capital Markets. “Managing climate risk starts with having consistent and transparent data. The results of this first-of-its-kind report will help insurance risk managers and regulators improve their risk management practices as they take on the vital work of maintaining a sustainable insurance sector.”
“This report offers invaluable insights that insurance companies across the United States can use to benchmark against their peers and adopt best practices, said Laura Zizzo, co-founder and CEO of Manifest Climate. “As climate risks escalate, society, business and governments now look to the insurance sector for leadership in risk identification and management. Manifest Climate is committed to leveraging its leading-edge AI powered platform, and expansive climate intelligence resources, including TCFD expertise, to support the sector’s transformation,” Zizzo added.
“Our strong new climate risk standard gives regulators powerful new tools to protect consumers and our planet,” said California Insurance Commissioner Ricardo Lara, co-chair of the bipartisan NAIC Climate and Resiliency Task Force that adopted the TCFD standard in 2022. “This valuable report will help insurance regulators and the public better understand how insurance companies are preparing for climate-related risks to the U.S. insurance market, which is the largest in the world. Insurance companies can learn from other industry leaders as they expand their reporting and adopt sustainable strategies including new products that can reduce risks and safeguard communities.”
The analysis shows broad engagement and diverse approaches from some insurance companies:
- Insurers are offering new products that support risk reduction among their customers or that support clean technology, and these offerings take a variety of specific forms.
- At least 20% of the responses mention forward-looking climate risk assessments such as climate scenario analysis or climate stress testing.
- Many insurers describe purchasing reinsurance as their primary strategy for managing climate risk, while some reinsurers describe how climate risk is leading them to reprice or reduce their offerings. Some insurers describe reliance on their reinsurance provider for climate risk education, expertise, and technical resources.
- Insurers describe a diverse array of strategies for managing climate risk.
Analysis of the first full year of TCFD-aligned reports helps set a benchmark to improve future reporting. Insurers across lines of business and sizes demonstrated ability to provide detailed disclosures according to all 11 TCFD recommendations. Property & casualty and life insurance companies most consistently provide comprehensive information. Metrics and targets was the area with the weakest responses across all lines, with only 193 reports providing information and very few encompassing a comprehensive set of climate-related metrics.
