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Introduction
Addressing the impact of climate change is a regulatory priority at Irish and EU level. Nowhere is this clearer than in the insurance sector. This is understandable given that insurers are both at the forefront of insuring the physical risks posed by climate change as well as being investors that can support the drive of capital towards sustainable investments. Both elements are key to Ireland's and Europe’s transition to a net zero economy.
Beyond the theme of sustainable investing and in light of recent extreme weather events in Ireland and overseas (e.g. recent floods in Spain and last year’s flooding in east Cork), it is a good time to take stock of what regulators expect insurers to do to help negate the impacts of climate change in our wider society, while at the same time remaining financially resilient.
Considering climate risk: regulator expectations of insurers
The The European Insurance and Occupational Pensions Authority (EIOPA) has been clear in its April 2021 and August 2022 opinions on climate change risk scenarios that it is essential for insurers to implement sustainable finance practices in their business. Insurers must understand the risks climate change poses to their own and to their policyholders’ businesses, and the own risk and solvency assessment (ORSA) plays a key role in achieving this. Similarly in Ireland, the Central Bank of Ireland (CBI) has been clear in its supervisory expectations when it comes to climate risk, issuing its Guidance for (Re)Insurance Undertakings on Climate Change Risk in March 2023 (the guidance).
Since then, the CBI has actively monitored industry uptake / compliance with the guidance. In its September 2023 Insurance Newsletter, the CBI issued findings from a review of insurers’ ORSAs, materiality assessments and quantitative analyses, noting that few firms were undertaking the broad materiality assessments in the holistic manner outlined in the guidance. A year later, in its September 2024 Insurance Newsletter, the CBI issued findings from its thematic review of insurers’ materiality statements noting that, while there is no ‘one size fits all’ approach to formulation / execution of materiality assessments, several ‘best practice’ approaches were emerging. These were:
While the CBI’s recent findings drew largely on the expectations set out in the original guidance, they serve as a useful reminder of core regulator expectations when it comes to climate risk assessment and risk management. The CBI has signposted that it will continue to actively monitor insurers’ consideration of climate risk, and we can expect further guidance/discourse on this in due course.
Closing the ‘NatCat’ protection gap: recent developments
Insurers remaining financially resilient in the face of climate risk is not the only expectation of regulators. Insurers playing their part in closing the natural catastrophe (NatCat) protection gap also sits high on regulators’ agendas. The heightened risk of adverse weather events due to climate change means that EIOPA is keenly focused on this issue. This is in no small part because only one quarter of NatCat losses are insured across Europe.
Closer to home, Ireland may not be one of Europe’s least insured jurisdictions but in certain parts of the country, including our two largest cites (Dublin and Cork) the gap is most acute. In September 2024, the CBI published its Flood Protection Gap Report, and one stark finding (of many) was that approximately one in 20 buildings has difficulty accessing flood insurance today, leaving owners, lessors and lessees exposed.
EIOPA has taken steps to progress with regulators ensuring NatCat risk is appropriately captured in insurers’ risk modelling. In April 2024, it launched a consultation on a reassessment of NatCat risk in the Solvency II standard formula. Interestingly from an Irish risk dimension, Irish flood is among the new risks / perils proposed in the recalibrated formula. This is timely given that the CBI observed in its June 2024 Insurance Newsletter that insurers with Irish flood risk failed to note that the current iteration of the NatCat formula does not include Irish flood risk. The proposed explicit inclusion of Irish flood risk means that NatCat risk analysis of the domestic Irish market should improve once the newly calibrated NatCat formula takes effect.
EIOPA also issued a final Staff Paper in February 2024 exploring the reasons behind limited uptake of NatCat insurance in Europe, as well as examining measures that could reduce demand-side aspects of the NatCat protection gap. Potential solutions considered by EIOPA include:
The solutions are varied and involve the input of other stakeholders, including governments. It remains to be seen which of (and to what extent) these solutions will feed into concrete regulatory policy / guidance.
Climate risk and sustainable finance forum: best practice approaches
Irish insurers should also pay close attention to the output of the CBI’s Climate Risk and Sustainable Finance Forum (the forum). Established in June 2022, the forum recently issued its first two reports. The forum’s report on capacity building examines gaps in stakeholders’ knowledge, awareness and understanding of climate / sustainability-related factors and the measures that can be taken to improve this. Meanwhile, the forum’s report on risk management identifies emerging good practices across the financial services sector in response to climate risks. Insurance-specific examples identified include:
The forum recommends that insurers ensure that climate risk management is effectively built into existing governance structures. Practical examples of best practice shared by the forum include:
What’s next from regulators?
Recent years have seen regulators dedicate significant focus to climate risk-related matters. While specific supervisory priorities change year-on-year, EIOPA is clear that climate change risk will remain an overarching supervisory priority through to 2027 and beyond. The CBI equally emphasises climate change risk as a factor guiding its strategic outlook in the years to come, noting the wider financial sector’s important role in mitigating the long-term implications of climate change and biodiversity loss. This means that insurers can expect continued regulator engagement on climate-related matters as the climate crises continues.
More specifically, in its recently published revised Single Programming Document (2025-2027), EIOPA highlighted the following as climate-related priorities:
Meanwhile, the CBI indicated in its September 2024 Insurance Newsletter that it will continue to engage with firms on climate change risks and this is likely to expand over time as the industry’s skills and analysis develops. We can also expect further industry engagement on key domestic issues, such as the Irish flood protection gap. While the CBI recognises insurers alone cannot solve the issues posed by the issues, the nature of insurers’ businesses means that they are likely to play a proportionately large and important role in this.
Finally, although not formally a source of regulatory guidance, the forum’s output is likely to be instructive in formulating the CBI’s (as well as the wider insurance industry’s) approach to managing the effects of climate change. It is therefore worthwhile for insurers to monitor the forum’s initiatives and policy proposals on an ongoing basis.
For advice or for further information on any of these this topics please contact Niall Murray, Solicitor, Laura Mulleady, Partner, Sinead Lynch, Partner or any member of the Insurance & Reinsurance team at ALG.
