Signs point to mandatory climate reporting for insurers

In September, the Bermuda Monetary Authority (BMA) issued a Discussion Paper entitled “Disclosure of Climate Change Risks for Commercial Insurers” in which they outlined proposal to mandate the formal reporting of climate risk against Task Force on Climate-related Financial Disclosures (TCFD) standards from year end 2024.

We explore the implications if this approach was adopted more widely by international insurance regulators through the IAIS.

Bermuda, as an insurance market, holds a distinctive position not only geographically but also culturally within the mid-Atlantic region. It strategically observes and aligns with regulatory and stakeholder developments, bridging perspectives from both Europe and North America. What happens in Bermuda often mirrors European developments, perhaps with 12-18 months and is often a precursor to developments to the west.

The BMA typically works by issuing Discussion Papers prior to formal consultation processes and then brings in regulations and guidance within 12 months. Their last substantive move on climate-related regulations was the Guidance Note on “Management of Climate Change Risks for Commercial Insurers” which was issued in March 2023, following a formal consultation in October 2022.

What is the BMA suggesting?

The latest discussion paper suggests the BMA will require insurance groups to disclose climate risk publicly, following TCFD standards, by the year ending 2024. Reporting will be required within the Financial Conduct Report (FRC) Pillar III disclosures that have been in place in Bermuda for several years. 

FCR reports are required to be filed with the regulatory every May and made public via the insurer’s website during June; these requirements will crystallise for insurance groups in May 2025, and for individual entities one year later.

The second point to highlight, is that the BMA firmly favour the use of materiality assessments in communicating the importance of climate risks to insurers and they are very supportive of the concept of double materiality, as adopted by European Union directives such as CSRD. Indeed, The BMA has clearly stated a presumption that climate change and its associated threats and opportunities is in their view a principal risk factor for all insurers and should be captured within their Own Risk and Solvency Assessments (referred to as GSSAs in Bermuda). They would expect to see a materiality assessment in place to justify any commercial insurer reaching a conclusion that climate risks were not a significant exposure. 

Thirdly, the BMA are signalling their vigilance and scepticism when insurers private disclosures, such as GSSA reports, significantly differ from their public climate disclosures in annual reports, or future FCR disclosures. They recognise that regulatory submissions by their very nature are more detailed, but they expect to see consistency between the two and more depth in public reports in future.

Finally, the Authority is requiring specific underwriting and investment metrics to be disclosed, the most interesting of which, is the exposure to natural catastrophe, on an all and individual basis at the Tail Value at Risk (TVaR) 99.0% level. They also signal that they will revisit the nature of disclosures as the understanding for climate exposures matures over time.

What could be the implications?

We have identified five interesting implications of this Discussion Paper, pending further consultation and review.

1. TCFD reporting will become mandatory for insurers.
   The BMA are making climate reporting against the TCFD standard mandatory. To our knowledge, this is the first time that an insurance sector regulator is imposing this requirement on all insurers, irrespective of side or listing status. It will be interesting to see whether this proposal has been developed in isolation, or whether other regulators, such as the Prudential Regulation Authority in the UK or Lloyd’s of London will follow suit. In our view, it seems unlikely that the BMA would be pursuing this development independently.
2. Regulators expect consistency.
   The BMA signals dissatisfaction with insurers presenting divergent climate risk management details publicly compared to their private regulatory filings. They specifically call out ‘greenwashing’ concerns and make it clear they will bring insurers who are seen to do this to task. This is a good reminder that an efficient reporting process should provide clear and consistent information for all stakeholder disclosures, including those made internally to the board and management.
3. Transition Plans.
   The regulator acknowledges an interest in transition plans and will expect these to be shared via the private regulator filings, such as the GSSA. They do not intend to mandate public reporting in this phase but will challenge insurers that do not have plans, particularly if they have made public commitments to carbon reduction.
4. Insurance Associated Emissions under review.
   The BMA are suspending judgement for now, on demanding the disclosure of Scope 3 greenhouse gas emissions associated with underwriting activities: pending the maturing of these processes. However, they do signal an interest and we would expect this to become a requirement over time.
5. ISSB adoption postponed.
   Again, the BMA have been pragmatic by pushing the adoption of TCFD reporting standards but will revisit this, probably in 2025-2026 once the new International Sustainability Standards Board (ISSB) reporting standards have been adopted internationally.

What do we suggest international insurers do as a result?

Our strong steer is to use the time wisely between now and these requirements coming into force in 2025. For insurers with operations in Bermuda, this is a given, but for European insurers or Lloyds’ managing agencies, we would suggest this is a signal for the future and an early warning which would be noted.

Take control of the agenda and make sure you are well prepared by:

1. Completing a dry run exercise.
   We strongly recommend firms complete a dry run exercise to assess their readiness to report in line with these new requirements. These new requirements will impact most organisations during 2025, for the year end 2024, and so the next 12 months offer an excellent opportunity to build capability in private. This will also support you to improve incrementally towards assurance-ready reporting, especially for international groups that are also responding to the implementation of ISSB and CSRD in other jurisdictions.
2. Strengthening controls and reporting processes.
   Establish internal controls and procedures capable of supporting the disclosure of information to a standard consistent with requirements. This may take some time for organisations to establish and mature. It is a challenge for many firms – there remains a significant gap between financial and non-financial reporting in terms of levels of testing and assurance in place to protect the organisation against the risks of misstatement.
   A good place to start is with an evaluation of existing controls, and how they compare to those of more established financial reporting. This should include ‘hard controls’ in relation to the collation and analysis of sustainability-related data, as well as ‘soft controls’ around report structure and presentation, explanation, and transparency in respect of limitations and measurement uncertainty.
   It should be noted that clause 24 of the current guidelines note that “tracking climate risks within the organisations will be imperative in order to assess and monitor the effectiveness of the procedures implemented. Therefore, the Authority recommends that insurers regularly assess the effectiveness of key control functions and the appropriateness of climate risk management and reporting frameworks.”
3. Harnessing internal audit as an ally to help you prepare.
   The internal audit function can support risk and climate teams to establish robust processes and controls. This is however still an emerging area for many internal audit teams, and so ensuring these teams upskill their knowledge and experience is key to getting value out of the process.

Determining how to respond to the increasingly challenging climate-related reporting environment is a growing issue for many organisations. At Crowe, we support our clients’ climate journey by:

• providing an overview of the existing frameworks and initiatives, as well as the current market and industry insights 
• assisting in the development of their climate risk route map 
• reviewing their draft disclosures and providing informal and/or formal feedback.

Please contact Alex Hindson or your usual Crowe contact for more information.