Guidance on Net Zero Transition for Insurers
The Monetary Authority of Singapore (MAS) has released guidance on net zero transition for insurers, aiming to help insurance companies improve their climate adaptability and risk management capabilities.
The net zero transition guidelines proposed by MAS apply to different financial institutions. In addition to the insurance industry, MAS has also formulated similar transition plans for the banking industry and asset management industry.
Introduction to Guidance on Net Zero Transition for Insurers
The net zero transition guidelines apply to all insurance companies operating in Singapore. Transition planning refers to the internal strategic planning and risk management process to address risks associated with the transition and potential changes to the business model. Insurers play an important role in helping clients, asset managers and investees make the net zero transition. MAS believes that insurance companies need to encourage these partners to participate in the transition rather than withdrawing investment or insurance activities.
Insurance companies’ investment and insurance behaviors are usually long-term, so they need to ensure the sustainability of their business from a multi-year risk perspective. MAS recommends that insurers use scenario analysis and stress testing to measure risks and set relevant decarbonization targets. Insurers will also need to consider the transition and physical risks faced by their customers and develop mitigation and adaptation measures.
Given the dependence between climate and nature, insurers will also need to consider other environmental risks beyond climate and weigh their impacts when designing climate-related programs. Insurers are also required to disclose short-, medium- and long-term climate risks and responses to help stakeholders understand the impacts of these matters.
Contents of Guidance on Net Zero Transition for Insurers
The guide to the net zero transition for the insurance industry is divided into several sections, namely governance and strategy, risk management, underwriting, investments, and disclosures.
In terms of governance and strategy, the support of an insurance company’s board and senior management is important, and MAS advises them to make decisions around business strategy and risk appetite, and to maintain oversight of environmental risk management and disclosure. Management needs to ensure that climate-related risks are integrated into overall operations and that existing risk management measures are regularly refined.
On the risk management side, forward-looking risk assessment tools such as climate scenario analysis and stress testing can enable insurers to understand the potential impact of climate risks and opportunities under different scenarios. The results of these risk assessment activities should be incorporated into internal planning processes (such as assessing capital adequacy) and appropriate management actions taken. Insurers also need to consider the impact of short-term fluctuations in emissions on a company’s climate risk management, especially in the early stages of investment and underwriting when these emissions may change significantly.
In terms of underwriting, insurance companies can provide insurance for projects where clients face physical risks and work closely with clients to implement risk monitoring. MAS believes that insurance companies need to develop processes for customer data collection, analysis, and response, and communicate with customers regularly to guide customers to develop plans that are consistent with the company’s climate risk preferences. Insurers can also group customers based on their risk characteristics, prioritizing riskier groups, and reaping the benefits.
In terms of investment, insurance companies need to understand the risks faced by investees and formulate relevant management measures. MAS believes insurers need to guide investees towards net zero transitions, rather than divest directly from sectors with higher climate risks. In addition to considering physical risks and transition risks, insurance companies should also consider the correlation between the two and other potential risks.
When it comes to disclosure, proper disclosure can protect companies from accusations of greenwashing and express net zero commitment to the outside world. Insurers can disclose information using internationally recognized disclosure standards. MAS is providing the industry with a 12-month transition period to assess and implement the guidance.