The Central Bank has urged insurance firms to insulate themselves against the risks emerging from the climate crisis which could threaten the solvency of insurance providers.
In its Guidance for (Re)Insurance Undertakings on Climate Change Risk report published today, the regulator said events like natural weather disasters may challenge existing business models of insurance firms and make it harder to provide affordable insurance.
“Taking action to ensure the financial system is resilient to climate-related risks, and to embedding climate change considerations across our own operations, is a key strategic priority for the Central Bank,” said Central Bank deputy governor Sharon Donnery.
The Central Bank also said insurers should prepare for the long term effects of climate change including the impact government climate policies could have, which the regulator said could lead to inflationary pressures and increases to interest rates.
The warning comes after the report found only 20% of insurers fully integrate climate change risk into their management framework, with fewer than half conducting some form of scenario analysis or stress testing.
The Central Bank indicated insurance firms should particularly focus on prolonged, clustered or repeated events that could impact the availability of insurance to businesses and homes.
Climate change risks to businesses are becoming increasingly common. For example, in Crossmolina, a village on the west coast of Ireland, businesses and homes have been plagued by numerous floods which have led to soaring insurance costs.
The Central Bank said insurance providers should consider sort term climate change scenarios over 10 years, medium term scenarios over 30 years, and long term scenarios over 80 years.
Physical risk drivers may include the geographic location of assets, the impact of natural catastrophes on the underwriting portfolio and future mortality and morbidity. Transition risk drivers may include investments in fossil fuel dependent companies, changing risk profile of business, litigation related claims, and reputational risk.