Guidance Note - Management of Climate Change Risks for Commercial Insurers (August 2022)

Summary

This BMA guidance note sets out the Authority's expectations for how commercial insurers and insurance groups should govern, manage and report on climate change risk. It covers corporate governance, enterprise risk management and ORSA reporting, applying the proportionality principle so expectations scale with an insurer's nature, scale, complexity and risk profile.

• Corporate governance: Boards must have clearly documented responsibilities for climate risk, ensure appropriate expertise or access to external advisors, mandate regular training, and implement a climate-specific reporting regime that escalates issues from legal entity level up to senior executives and the board.
• Risk management (ERM): Insurers must embed climate risk identification, assessment, management, escalation and reporting into their ERM framework, adopt a climate risk appetite, and regularly perform materiality assessments across insurance, investment/market, credit, operational, reputational, strategic and legal/litigation risk channels.
• ORSA reporting: Insurers must include in their year-end ORSA an assessment of their climate risk framework implementation status and an action plan, including scenario analysis covering physical and transition risks over short, medium and long-term horizons, with base and extreme scenarios described along with assumptions and methodologies.
• Implementation timeline: Insurers are expected to begin reporting climate risk status and action plans starting with year-end 2022 ORSA filings, with a fully operational framework expected by year-end 2025; the Authority will monitor progress via offsite analysis and on-site visits from 2023 onward.

The guidance applies minimum standards but is not itself binding law; it reflects the Authority's supervisory expectations and will be used to assess insurers' governance, risk management and ORSA practices going forward.

Key obligations

• Insurers must provide in their year-end ORSA, starting with year-end 2022, an assessment of their status in implementing a climate risk management framework and an action plan addressing policies, procedures and governance
• Insurers must have a fully adopted and operational climate risk assessment, review and monitoring framework on or before year-end 2025
• Boards must document clear responsibilities for managing climate change risks and ensure governance processes embed a forward-looking approach to climate risk
• Insurers must establish clear roles and responsibilities for climate risk within the board and senior executives, with functional collaboration across the organisation
• Insurers must adopt and implement a reporting regime specific to climate risk, including escalation from legal entity level to senior executives and the board (for groups)
• Boards must ensure bye-laws mandate appropriate climate risk expertise or access to external resources, and embed regular dedicated training for board members and relevant staff
• Insurers must establish a risk appetite for climate risk and embed identification, assessment, management, escalation and reporting measures into their ERM framework
• Insurers must regularly undertake materiality assessments of climate-related risks using stress tests and scenario analyses
• In ORSA filings, insurers must document processes for identification, measurement, management and reporting of climate risks in line with strategy
• Insurers must incorporate climate risk scenario analysis in the ORSA covering short, medium and long-term horizons, with base and extreme scenarios and disclosed assumptions and methodologies
• The ORSA must detail how the insurer monitors exposure related to policyholders, asset managers, business partners, and direct and indirect climate impact

Applies to

commercial insurers (classes 3A, 3B, 4, C, D and E), insurance groups, long-term insurers

Deadlines

• year-end 2022: Insurers must begin providing an assessment of climate risk framework implementation status and an action plan in their year-end ORSA
• year-end 2025: Climate risk assessment, review and monitoring framework and measures must be adopted and fully operational
• from 2023: The Authority will begin monitoring insurers' progress via offsite data analysis and on-site visits