Just a fraction of UK non-life insurers have referenced the Taskforce on Climate-related Financial Disclosures (TCFD) in their Solvency II reporting, analysis by Lane Clark & Peacock (LCP) has found.
LCP’s annual analysis of Solvency II reporting from the top 100 UK and Ireland non-life insurers found that just 6% referenced the TCFD, despite government plans for disclosures to become mandatory in the coming months.
While it isn’t a requirement to report specifically on climate change issues in Solvency II reporting, the researchers said that the low number of firms referencing the new regulations is “striking”.
Although 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.
This comes after the Prudential Regulation Authority (PRA) wrote to insurers in 2020 advising them to have fully embedded their approaches to managing climate-related financial risks by the end of this year.
“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,” said Cat Drummond, partner at LCP.
“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.”
The analysis also shows that 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 as they looked to their parents and shareholders to maintain financial strength during the pandemic.
The proportion of firms holding ancillary own funds has doubled over the last two years from 5% to 10%, while total aggregate investments and cash increased from £184bn to £194bn during 2020.
Moreover, the percentage of firms considering cyber risk as a key threat has increased from 49% to 63% over the last year. In contrast, the proportion of insurers considering Brexit as a key risk continues to fall, and is now only 30%, compared to 42% last year.
“On the whole, the insurance industry has weathered the immediate fallout from the pandemic,” Drummond continued. “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.”
