An analysis of the climate risk exposure faced by investments held by the insurance industry was released by the California Insurance Commission this week.
The climate risk scenario analysis found that insurers’ assets are exposed to climate-related transition risks with the possibility of fossil fuel investments becoming stranded assets. Further, additional risks are faced by these assets due to climate-related physical impacts. For example, investments in coal-powered utilities are significantly exposed to wildfires, while other assets in which insurers invest could be adversely impacted by water scarcity.
“Insurers, like all investors, need to analyze and consider the climate change related risks facing their considerable investment portfolios,” California Insurance Commissioner Dave Jones said. “While we are the first financial regulator to undertake an analysis of both climate-related physical risks and transition risks to insurer investments, we know that other financial regulators, as well as investors, are also moving forward to implement the important recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, including climate risk scenario analysis. I urge insurance companies to run multiple scenarios in assessing their investment and underwriting exposure to climate-related risk, especially in light of the recent UN Intergovernmental Panel on Climate Change and US National Climate Assessment reports and the adoption of an international Paris Agreement ‘rulebook’ at COP 24 all of which point to a transition away from burning fossil fuels. Climate-related physical risks such as wildfires are also becoming more pronounced, with implications for insurers as underwriters and investors.”
The Commissioner tapped a consultant, 2° Investing Initiative, to conduct this analysis for insurers in California’s insurance market with over $100 million in annual premiums.
“This initiative shows that scenario analysis is an accessible tool for financial supervisors to monitor both physical and transition climate risks and support their regulated entities on managing these risks. It creates a blueprint that other financial supervisors can follow. Automated, scalable and technology-driven solutions related to sustainability are ushering in an era of more cost-effective supervision – both for supervisors and financial institutions,” Jakob Thomae, Managing Director, 2° Investing Initiative, said.
The modelers used several scenarios, including a 2 degrees Celsius scenario and an under 2 degrees Celsius scenario.
The analysis is the first to include analysis of both physical and transition risks faced by insurers assets.
“Climate action by insurers and regulators requires looking ahead and understanding climate-related risks across insurance and investment portfolios,” said Butch Bacani, who leads UN Environment’s Principles for Sustainable Insurance Initiative (PSI), the largest collaborative initiative between the UN and the insurance industry. “The ground-breaking work of the California Department of Insurance in climate risk scenario analysis is a shining example of leadership and ambition. It highlights the sophisticated understanding needed across the insurance industry to better manage climate risks and opportunities, and to drive ambitious action in line with the aims of the Paris Agreement.”