OSFI posts new guidance on climate risk stress testing

The Workplace of the Superintendent of Monetary Establishment’s (OSFI) newly launched draft of Climate Risk Administration might imply P&C insurers must embody climate state of affairs evaluation as part of their stress testing — and it might require insurers to account for added capital.  

Pertinent to insurers, state of affairs evaluation for climate-related monetary dangers is among the many ideas proposed by OSFI. “The FRFI ought to use climate state of affairs evaluation to evaluate the influence of climate-related risk drivers on its risk profile, enterprise technique, and enterprise mannequin,” the draft reads.  

OSFI notes it will likely be growing a standardized climate state of affairs evaluation train to evaluate exposures to dangers and evaluate FRFI approaches to climate state of affairs evaluation. FRFIs will likely be required to use these eventualities and report their outcomes to OSFI. 

One other precept states FRFIs ought to measure and preserve their out there capital and liquidity buffers to guard towards climate-related dangers. “The FRFI ought to incorporate climate-related dangers into its Inner Capital Adequacy Evaluation Course of (ICAAP) or Personal Risk and Solvency Evaluation (ORSA) course of,” the doc reads. 

It additionally notes FRFIs ought to incorporate the influence of climate-related drivers on its liquidity risk profile. This may occasionally contain integrating “a variety of FRFI-specific and market-wide extreme, but believable, climate-related stress occasions when assessing the adequacy of its liquidity buffers. For instance, the FRFI ought to take into account, amongst different issues, the influence of elevated drawdowns of deposit balances and credit score/liquidity strains for counterparties delicate to climate-related dangers, volatility in insurance coverage claims expertise attributable to climate change, and many others.”  

It’s but unclear whether or not or not OSFI’s expectations are above and past what P&C insurers already do in figuring out capital adequacy in preparation for climate-related disasters.

Suntil present process public session, OSFI’s intensive tips set up the regulator’s expectations for a way all federally regulated monetary establishments’ (FRFI) will handle their climate-related dangers. 

“Constructing resilience towards climate-related dangers requires FRFIs to deal with vulnerabilities of their enterprise mannequin, their general operations, and in the end on their steadiness sheet,” the draft guideline, launched at present, reads. 

OSFI notes its expectations of FRFIs in accounting for climate dangers embody:  

• The FRFI understands and mitigates towards potential impacts of climate-related dangers to its enterprise mannequin and technique. 
• The FRFI has applicable governance and risk administration practices to handle recognized climate-related dangers. 
• The FRFI stays financially resilient via extreme, but believable, climate risk eventualities, and operationally resilient via disruption attributable to climate-related disasters. 

In an effort to extend transparency, OSFI can also be introducing necessary climate-related monetary disclosures. 

These within the disclosure of an FRFI’s climate-related monetary risk data might embody traders, analysts and most people, amongst others. “These disclosures will incentivize enhancements within the high quality of the establishments’ governance and risk administration practices associated to climate,” the information launch reads.  

The disclosure guidance aligns with a dedication made by the federal authorities to require monetary establishments to publish climate disclosures beginning in 2024. 

“By offering this broad group of stakeholders with key risk and risk administration data, these disclosures can construct confidence in FRFI administration, and allow FRFIs to draw, or preserve their entry to, capital and liquidity channels.” 

The press launch notes that almost all federally regulated monetary establishments are within the “early phases of constructing climate-related risk evaluation capabilities.”  

Public feedback to draft are being sought by OSFI earlier than Aug. 19, 2022. The regulator plans to subject the ultimate model of this guideline by early 2023.  

Extra data to come back.  

Function picture by iStock.com/mikkelwilliam