How OSFI expects insurers to manage climate-related risks

Canada’s federal solvency regulator wants, among other things, P&C insurers to develop and implement a plan to maintain operations during climate-related disasters, climate scenario analysis as a part of their stress testing, and metrics on their greenhouse gas (GHG) emissions.

The Office of the Superintendent of Financial Institutions’ (OSFI) today released the final version of its Guideline B-15: Climate Risk Management for federally regulated financial institutions (FRFIs).

The regulator has warned FRFIs of “severe, yet plausible” climate-related events that could lead to losses for FRFIs. 

“This means institutions must explain how they will manage risks associated with transitioning towards a low-carbon economy,” an OSFI senior official said in a media briefing. “The guideline also includes governance and risk management expectations, risk quantification including scenario analysis, and mandatory climate risk disclosures.” 

The regulator did not, however, lay out specific amounts of capital for insurers to set aside. An OSFI senior official said the onus is on insurers to complete their own risk and solvency assessment (ORSA) and determine their capital buffers. 

Disclosure expectations have been set out for FRFIs under the following categories (among others):   

• Governance: FRFIs will be expected to describe the board of directors’ oversight of climate-related risks and opportunities, and describe management’s role in assessing and managing climate-related risks and opportunities.  
• Strategy: Among other measures, financial institutions will be required to describe the resilience of the FRFI’s strategy, taking into consideration different climate-related scenarios. 
• Risk Management: Describe the FRFI’s processes for identifying, assessing, and then managing climate-related risks, and how such measures will be integrated into the FRFI’s overall risk management.  
• Metrics and Targets: Among other measures, disclose the FRFI’s greenhouse gas (GHG) emissions for the period (absolute basis), and the related risks; and describe the targets used by the FRFI to manage climate-related risks and opportunities and the FRFI’s performance against these targets. 

Expanding on the strategy expectations, an OSFI senior official told media Tuesday: “We asked financial institutions to include a climate scenario analysis, which limits warming to the level aligned with the latest international agreement on climate change, or lower, when describing the resilience of their business strategies. This is 1.5 C above pre-industrial levels, based on the 2015 Paris agreement.”

In addition, FRFIs will be required to complete standardized climate scenario exercises and report their results to OSFI periodically. 

Guideline implementation will be effective at the end of the fiscal year 2024 for domestic banks and international insurers. For other federally regulated financial institutions, the guidelines will become effective at the end of the fiscal year 2025. 

“We have given institutions an extra year to comply with more challenging measurements, such as Scope 3: greenhouse gas emissions,” OSFI’s senior official said. “This guideline will evolve iteratively. We intend to review and amend the guideline as practices and standards evolve.” 

Through its disclosure expectations, the regulator has outlined the following three expected outcomes for FRFIs: 

• The FRFI understands and mitigates against potential impacts of climate-related risks to its business model and strategy.  
• The FRFI has appropriate governance and risk management practices to manage identified climate-related risks.  
•  The FRFI remains financially resilient through severe, yet plausible, climate risk scenarios, and operationally resilient through disruption due to climate-related disasters. 

Feature image by iStock.com/pcess609