The Bermuda Monetary Authority (BMA) has issued an updated guidance note on the Management of Climate Risk for Commercial Insurers. The guidance note is targeted at ensuring and maintaining financial soundness, the ongoing viability of the insurance sector, and the contribution of commercial insurers to an orderly transition to a net-zero economy. Focusing on corporate governance and risk management practices for climate risk in the context of ESG risk, the guidance note is part of the revised insurance code of conduct applicable to all Bermuda regulated insurers. The BMA has acknowledged that risks associated with climate change are constantly evolving and that climate risk management frameworks may not be entrenched by commercial insurers. Accordingly, the BMA says it has decreased its expectations for the 2022 year-end such that insurers are expected to comply with the principles of the guidance note on a ‘best efforts’ basis until the final version is published. The BMA will require a fuller integration of the expectations outlined in the guidance note, as may be updated, from 2023 year-end onwards. This will include an evolving materiality assessment of the insurer’s exposure and impact to climate risk. To assist, the BMA has added a section on “Materiality Assessments and Double Materiality” in the guidance notes, which should be the starting point for analysing exposure to climate change risks. This guidance note only applies to commercial insurers and insurance groups, while taking into account the diversity of such insurers in the market. Commercial insurers and insurance groups are expected to provide an overarching view of how climate change risk and its exposures affect the insurer or group in their year-end 2022 Own Risk and Solvency Assessment. This also involves outlining key affecting climate change risks and the chosen approach to taking those risks Insurers and insurance groups will also be expected to outline ESG risk priorities for 2023 and an action plan to indicate the appropriateness of policies, procedures and other relevant matters, such as governance by the insurer’s board of directors and senior executives. The latter should be fully operational on or before year-end 2025. The BMA expects a fuller integration of expectations in ORSA from 2023 onwards and expanded future iterations. While minimum standards embedded into an insurer’s or group’s operations are ultimately targeted, the BMA’s expectations will continue to be based on the principle of proportionality. Therefore, the application of the guidance note will be dependent on the nature of the operations and the scale, complexity and risk profile of an insurer’s or group’s insurance business, as well as its materiality assessment for climate risk overall and within the various risk categories. The BMA has indicated that it expects the Guidance Note to become fully effective at the end of Q1 2023. Although, as aforementioned, commercial insurers and groups have until year-end 2025 to implement their climate change action plan, including appropriate governance measures.
