IIF Authors

Status: Will be live at 02/27/2024 09:51

IIF Response to IAIS Draft Application Paper on Climate Scenario Analysis

On November 23, the IAIS published a public consultation on climate risk scenario analysis in the insurance sector, which focuses on the use of climate-related scenario analysis as a tool used by both supervisors and insurers to understand the risks to which the insurance sector is exposed at a micro- and macroprudential level. In its response, submitted on February 23, the IIF describes the limitations around the current capabilities of climate scenario analysis given the high degree of estimation, assumptions, and dependencies in current climate modeling. Given these limitations, the response letter argues that substantial improvements in data quality and modeling are needed before the results of climate scenario analysis will be decision-useful. With these limitations in mind, the IIF notes that public disclosure of individual firms’ climate scenario analysis results could run the risk of misleading stakeholders and thereby pose undue risks to insurers. Further, the materiality of climate risk across insurers should be considered, as climate-related risk drivers may be significant for certain insurers and business lines more than others.

The IIF further contends that at this time it would be inappropriate for supervisors to use scenario analysis for macroprudential assessments due to its limitations and potential for misleading results. Supervisors are encouraged to use existing tools, such as the Holistic Framework and the global monitoring exercise (GME), which assesses trends and development in the sector in order to detect the possible build-up of systemic risks.

With these considerations in mind, the IIF advocates for a principles-based, incremental approach to scenario analysis, recognizing the ongoing development of methodologies and the need for collaboration with industry experts.