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Turning up the heat – climate risk assessment in the insurance sector

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FSI Papers  |  No 20  |  06 November 2019 by  Patrick Cleary, William Harding, Jeremy McDaniels, Jean-Philippe Svoronos and Jeffery Yong PDF full text (636kb)  |  43 pages Executive Summary (95 KB, PDF) Climate risks are recognised as a critical threat to society, with potentially adverse implications for financial stability and the viability of insurers. Efforts have been made by insurance supervisors and insurers in some jurisdictions to better understand climate risks, but further efforts are needed. To facilitate a better understanding in this area, this

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FSI Papers  |  No 20  | 
06 November 2019
PDF full text
 (636kb)
 |  43 pages

Climate risks are recognised as a critical threat to society, with potentially adverse implications for financial stability and the viability of insurers. Efforts have been made by insurance supervisors and insurers in some jurisdictions to better understand climate risks, but further efforts are needed. To facilitate a better understanding in this area, this paper examines the different regulatory approaches currently in place relating to climate risk assessment, in particular through enterprise risk management frameworks. The paper also describes how some supervisory authorities have undertaken climate risk assessment exercises, focusing on stress test and scenario analysis approaches. In general, the paper finds that risk quantification techniques and models that consider climate risks are more advanced for physical risks, but are still at an early stage for transition and liability risks. Looking ahead, there is room to enhance international cooperation among insurance supervisors, and within financial policy and regulatory forums to improve understanding of climate risks and their potential impact on firms, policyholders and financial stability. Other key policy issues that require consideration include the impacts of climate risks on access and affordability of insurance products, and the potential use of capital requirements to address climate risks.

JEL classification:  D62, E58, E61, F42, G11, G18, G20, G22, G28, G32, Q28, Q54

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

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