5 August 2021
A new report from LCP highlights risks relating to climate change are not being sufficiently prioritised by many insurers, despite new reporting regulations from the government coming down the tracks.
LCP’s annual analysis of Solvency II reporting from the top 100 UK and Ireland non-life insurers shows that only 6% of firms referenced the TCFD (Taskforce on Climate-related Financial Disclosures) despite the UK government plans for these to be mandatory in the coming months.
This is in the context of last year’s “Dear CEO” letter from the Prudential Regulatory Authority, (PRA) which says that firms should have fully embedded their approaches to managing climate related financial risks by the end of this year.
While it isn’t a requirement to report on specifically climate change issues in Solvency II reporting, LCP believes the low number of firms referencing the new regulations is striking. While 60% did discuss climate change as a wider issue this was only a modest increase on the 48% seen last year despite climate change regulations being imminent.
Other key insights from the report about the health of the insurance industry include:
- Insurers continue to be well capitalised in the wake of COVID-19, with eligible own funds ratios averaging 208%.
- Several firms have relied on capital support to improve solvency. This highlights the reliance firms have on their parents and shareholders to maintain their financial strength in uncertain times.
- The proportion of firms holding ancillary own funds has doubled over the last two years from 5% to 10%.
- Total aggregate investments and cash has increased from £184bn to £194bn over 2020, having been broadly stable over the preceding four years.
- Equity exposures continue to reduce, with both the proportion of aggregate investments in equities and the proportion of firms investing in equities reducing.
- Many firms now confirm that ESG considerations form part of their investment strategies. Some have made explicit commitments to reduce their exposure to carbon-intensive sectors, whilst others discuss updating their strategies to include new ESG criteria and increasing their expectations of their investment managers in this area.
- The proportion of firms considering cyber risk as a key risk has increased from 49% to 63% over the last year. In contrast, the proportion of firms considering Brexit as a key risk continues to fall and is now only 30%, compared to 42% last year.
- The proportion of firms that considered conduct risk as a key risk also increased over the year from 46% to 62%. This reflects the publication last September of the FCA’s final findings of its general insurance pricing practices market study. The findings will have repercussions for the home and motor general insurance markets with new rules to prevent firms ‘price walking’ coming into place at the end of the year. LCP expects this issue to rise up the industry’s agenda this year.
- 29% of firms mentioned diversity and inclusion initiatives. This was mostly focussed on diversity on the Board, but some firms also discuss initiatives across the business more widely.
Cat Drummond, Partner and author of the report, commented: “On the whole, the insurance industry has weathered the immediate fallout from the pandemic. The industry now needs to make sure it isn’t behind the curve when it comes to climate risks. While the pandemic and cyber risk have rightly been key considerations over the past year, the scope of the new regulations on climate change means that insurers will need to quickly re-prioritise their action plans to ensure they are ready for when the new requirements go live.
“The PRA expects firms to have fully embedded their approaches to managing climate risk across governance, risk management, scenario analysis and disclosure requirements by the end of the year. Firms who address this quickly will be in line with the direction of policy travel as well as better prepared to manage climate risks that may already be starting to crystallise.”