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The Regulator acknowledged its stakeholders continued engagement and support in furthering the Bermuda regulatory framework's developments and critical strategic initiatives, and stated,
"It remains committed to working closely with its stakeholders to ensure that the Bermuda supervisory regime is effective, proportionate and aligned with international standards."
The guidance describes climate change risk as having a transversal nature and this view is reflected in the broad range of expectations described which include Board responsibilities and governance, strategy, risk management, risk monitoring and escalation regimes, staff training requirements, as well as expectations surrounding the ORSA and scenario analysis.
The Regulator expects there to be impacts that arise from climate change that affect insurers' roles as investors and underwriters which can have a significant bearing on the future sustainability of the insurance industry. The Regulator expects insurers to assess the impact of these risks on their operations, and also expects them to ensure that the processes and controls that are established to mitigate and manage these risks are appropriate to the insurer and fully integrated into operations.
Response to Industry Feedback
- Proportionality Principle:
The BMA emphasises the principle of proportionality applies to the expectations listed in the Guidance Note, and specifically that "an insurer's application will be dependent on the nature of its operations and the scale, complexity and risk profile of its insurance business as well as its materiality assessment for climate risk overall and within the various individual risk categories."
- Timing in adopting this Guidance Note:
The BMA has adjusted its expectations for year-end 2022 CISSA/GSSA (ORSA) reporting, highlighting the expectations are on a best-effort basis and insurers can focus on providing a summary in the respective report, which should now include:
- An overarching view of how climate change risk and its exposures affect the insurer, outlining the key climate change risks affecting them and the chosen approach to tackling these risks;
- Outline priorities for 2023;
- An outlook for arriving at an action plan to be implemented in meeting the requirements by 2025, inclusive of any framework changes.
From year end 2023 onwards, insurers are expected to carry-out an overarching climate risk status assessment regarding the implementation of an appropriate framework that includes a clear action plan, inclusive of timelines and a prioritisation approach.
- Materiality and Double Materiality:
The Regulator has expanded on both concepts, providing further guidance on materiality assessments for climate change exposures and noting the following expectation in respect of double materiality: for insurers to;
"specifically consider their own external impact on climate change (i.e. double materiality) by focusing on areas that may also revert back and affect in the short, mid or long term their reputation with stakeholders and their strategy, as a consequence of their own financial performance and operations."
In addition, the BMA recognises the evolving nature of double materiality concept, and encourages insurers to further develop their approaches and capabilities in this area.
- Board Understanding and Expertise on Climate Change Risk:
Previously the Board were required to understand and assess the financial risks that may stem from climate change risk factors. This wording has been revised to
"The board should have sufficient knowledge of and assess the financial risks that may stem from climate change risk".
It is the BMA's assessment that the responsibility for climate risk management should rest with one individual.
- Bye-Law Amendment:
The requirement to amend Board bye-laws has been removed and replaced with a requirement for updated policies and procedures or Terms of Reference.
The Guidance Note is intentionally prescriptive, however the materiality assessment of climate change risk will ultimately guide companies on their level of focus.
- Group versus Entity Level Application:
The BMA does not object to climate change risk management frameworks at the group level to be applied at the entity level, as long as the principles mentioned in the Guidance Note are adhered to.
- Escalation of Climate Change Risk:
Given that most companies follow the same escalation procedure for climate change risk that are applied to all risks, the Regulator agrees that separate policies and procedures for the escalation of climate risk specifically are not required; however, where climate risk escalation procedures vary from those other risks, these delineations should be highlighted.
- Review Frequency for Climate Risk Governance and Strategy:
The frequency of reviewing climate strategy and governance has changed from an annual requirement to a regular review.
- Risk Appetite, Policies and Procedures for Climate Change Risk Specifically:
The BMA noted that where climate change is deemed to be adequately captured and mitigated in existing policies, and climate risk appetite clearly defined within specific risk areas, a standalone climate change risk management policy is not required.
In relation to the assessment, review and monitoring of climate change risks, the framework and measures are to be adopted and fully operational on or before year-end 2025. The Regulator expects continuous advancement and aims to monitor the progress of this regime by insurers via offsite data analysis and on-site visits from 2023 onwards, and therefore recommends that insurers include updates on action plan implementation in the CISSA on an annual basis.
How Can We Help?
We recommend Commercial Insurers prioritise how they will meet the expectations of the BMA set out in this Guidance Note. We understand the practical, operational aspects and can assist firms in the interpretation and implementation of regulatory requirements, guidance and feedback.
If you would like to know more, contact Tanya Beattie or your usual Grant Thornton contact.