The Bermuda Monetary Authority has issued guidance notes outlining its expectations for the island’s commercial insurers and insurance groups regarding their management and reporting of climate change risks.

Issuing guidance notes, the island’s financial services regulator said: “Climate risk is a global issue and it is far-reaching in impacting the physical and macroeconomic environments in which insurers operate.

“Given the latitude of their implications and long-term nature, climate-related risks can become a significant financial risk to insurers and, as a result, the underlying stability of the financial sector.

“Therefore, robust management of climate risk is crucial to ensuring and maintaining the financial soundness and ongoing viability of the insurance sector in general, as well as insurers’ abilities to contribute to an orderly transition to a net-zero economy.”

The requirements are to be phased in, beginning with year-end 2022 reports.

They focus specifically on corporate governance and risk management practices for climate risk.

In the notes, the BMA said: “Climate-related risks can impact not only insurers’ underwriting activities but also their operations and investments, which can have a direct impact on their ability to satisfy policyholder obligations.”

The organisation said insurers were expected to take a proactive approach to manage and, where possible, mitigate the risks associated with climate change.

The regulator added that it expected insurers to not only assess the impact of these risks on their operations, but also expected them to ensure that the processes and controls that were established to mitigate and manage these risks were appropriate to the insurer and fully integrated into operations. This includes the insurer’s strategy and governance structure.

The BMA said its expectations continued to be based on the principle of proportionality.

It acknowledged that a fully fledged climate risk management framework may not be currently embedded by insurers.

But it said insurers would be expected to provide in their year-end reporting – beginning with year-end 2022 – “on a best-effort basis, an initial overarching view of how climate change risk and its exposures affect the insurer in outline; key climate change risk exposures and any approaches to tackling them; along with an indication of priorities for 2023; and an outlook on arriving at an action plan to be implemented in meeting the requirements by year-end 2025”.

The BMA added: “From year-end 2023 onwards, insurers are expected to carry out an overarching climate risk status assessment regarding the implementation of an appropriate framework that includes a clear action plan, inclusive of timelines and a prioritisation approach.”

A commercial insurer’s solvency self-assessment “should indicate the appropriateness of, and implementation progress for, policies, procedures and other relevant matters, such as governance by the insurer’s board of directors and senior executives.

“In relation to the assessment, review and monitoring of such risks, the framework and measures are to be adopted and fully operational on or before year-end 2025.”

The BMA added that it “expects continuous advancement and aims to monitor the progress of this regime by insurers via off-site data analysis and on-site visits from 2023 onwards”.