What you need to know about the HKIA Survey on Climate Risk Management

I. Background

On 30 June 2023, the Insurance Authority (IA) issued a long awaited climate risk management survey of Hong Kong authorised insurers. Interestingly, the IA survey comes at a time of significant change in global reporting standards and potential change in monitoring:

• On 26 June, the International Sustainability Standards Board (ISSB) issued the first two IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. 
• On 10 July, the Financial Stability Board (FSB) has requested the IFRS Foundation to assume the responsibility for monitoring companies' climate-related disclosures, taking over from the Task Force on Climate-related Financial Disclosures (TCFD).

As expected, IA’s survey is a detailed request to understand the implementation status of climate risk, current practices, gaps and challenges for insurers. IA note that the survey will help identify areas of improvement and assist IA in developing practical and appropriate guidance. 

The survey covers the key strategic and execution aspects we would expect of climate risk management. Insurance companies are requested to rate their implementation progress using the scoring scale below. 

The submission deadline for the survey is 14 August 2023.

II. Design of the Survey

The survey collects information by 5 key components and 16 sub-components explained below. 

A. Strategy

The first section explores if insurance companies have considered and included climate risk factors in their planning processes where respondents are required to rate the underlying drivers for including climate risks in: Strategic plan, Business plan (underwriting / product development and investment), Financial plan, Operational plan.

B. Governance

The second section focuses on the governance structure of climate risk management framework where insurance companies are required to rate their development across: Oversight, Roles and responsibilities, Capacity building, Remuneration / incentive plan.

C. Risk management

The third section drills down into the climate risk management cycle where respondents are required to rate their development in the following aspects of climate risk management: Formulation of climate risk appetite, Risk identification, Risk measurement, Risk monitoring, Risk control and mitigation and Risk reporting.

D. Scenario analysis / stress testing

The fourth section concentrates on the climate risk scenario analysis or stress testing practices of insurance companies where respondents to rate their objectives, assumptions, data sources, horizon, and risk drivers underlying these quantitative studies.

E. Disclosure

The fifth section explores the motivation and international standards adopted / to be adopted by insurance companies in developing climate risk disclosures in annual reports or other company publications. 

Environmental risk management

A separate final section assesses the consideration and integration of environmental risks into the risk management framework and practices of managing environmental risks.

III. Deloitte observations on the Survey

As IA review and analyse the responses from the survey, we hope that IA will take account of:

1. Liability risk which is the risk due to claims from those who have suffered losses from climate change (i.e. from individuals, corporates or class action). With climate change litigation on the rise with many watershed legal battles fought recently, understanding actions insurers are taking or plan to take on Liability risk would be helpful.
2. Under Governance, noting that insurers may be taking a number of the approaches listed in totality and hence may find it challenging to rank these governance steps on a scale of 1 to 5 e.g. Board oversight of climate risk with sustainability unit, new senior management role (e.g. Sustainability Officer) and appointment of member of Board (e.g. CRO) to implement climate risk management.
3. Under Risk Management, how insurers are treating climate risk in their risk taxonomy:
   a. Standalone risk; or
   b. Cross-cutting risk (impacting existing risk drivers such as market, credit, operational risk etc. to varying degrees). This approach is considered good practice.  
4. Data challenges faced for climate risk i.e. data sources in use / planned to be used to help provide insights at a later stage to the industry.
5. For Scenario analysis or stress testing, the types of scenarios used for both physical risk and transition risk assessment (e.g. transition risk scenario analysis may use Network for Greening the Financial System (NGFS) Delayed transition and Net Zero 2050 while physical risk scenario analysis may use NGFS Current Policies scenario or even Representative Concentration Pathway scenarios (RCP6.0 or RCP8.5)). This will potentially help IA provide guidance to improve consistency across the industry around scenario analysis.

IV. Deloitte conclusion on the Survey

The survey is a major step in the right direction by the IA and a valuable opportunity for insurance companies in Hong Kong to stock-take of their current climate risk management practices and plan for future development in this highly important topic. This will allow both IA and Hong Kong insurers to catch up to leading regulators and insurers in other jurisdictions on climate risk management.

If you have any questions, please contact our professionals:

	Dhiran Dookhi Partner, Actuarial +852 9500 9681 ddookhi@deloitte.com.hk		John Sayer Executive Director, Deloitte CarbonCare Asia +852 9332 7166 josayer@deloitte.com.hk
	Francis Lau Director, Actuarial +852 9261 5545 frlau@deloitte.com.hk