OSFI responds to industry’s concerns re: climate risk reporting

Canada’s solvency regulator has tweaked its climate risk reporting guidelines in response to input from the property and casualty insurance industry.

In several ways, OSFI has responded positively to concerns expressed by P&C insurers over how climate change-related risk and data will be collected and reported, starting in 2025.

For example, under the B-15 Guideline, the Office of the Superintendent of Financial Institutions (OSFI) has agreed to align its definitions of climate change perils in its proposed Climate Risk Returns to the definitions of modelled perils according to the P&C insurance industry’s major catastrophe model vendors.

“Insurers urged OSFI to provide greater clarity on perils definitions — e.g. ‘water,’ ‘convective wind’ and ‘other climate change-driven perils,’ and suggested aligning perils definitions to industry standards to avoid ambiguity and misinterpretation,” OSFI states in a published response to the public commentary, released today.

“Insurers also recommended that OSFI use consistent terminology (e.g., ‘climate change-related perils,’ ‘climate change-driven perils,’ ‘climate change-driven’) in the returns’ instructions.”

Also, the regulator has recognized smaller organizations may have issues collecting and reporting data in areas where there aren’t any Partnership for Carbon Accounting Financials (PCAF) methodologies available for measuring greenhouse gas emissions (GHG).

And so, P&C insurers will be required to report only those climate-related asset classes for which PCAF methodologies exist for calculating GHG emissions. OSFI reserves the right to adopt additional “phase-in” requirements over time.

Related: OSFI calls for detailed reporting of insurers’ climate risks

OSFI has agreed to require P&C insurers to report on climate change probable maximum loss (PML) figures on a national basis. But its expectations about more geographic granularity in the future are clear.

For example, although OSFI has cut P&C insurers some slack regarding the geographic granularity of climate data required in the first round of disclosures, the regulator expects more granularity in the reporting in future iterations of the disclosures.

During the public consultation period last summer, insurers and banks asked OSFI to re-evaluate its requested level of granularity and coverage of the returns. OSFI had requested data for some climate-related assets and metrics at the FSA (forward sortation area) level, meaning a geographic area identified by the first three digits of a postal code.

OSFI has granted the industry’s request, at least for the time being.

“FRFIs [federally regulated financial institutions] will be required to report certain asset classes and [climate-related] metrics at the provincial or national level,” OSFI says in response to the industry’s request. “However, FSA-level information will be expected of FRFIs in OSFI’s next iteration of the returns.

“As such, OSFI encourages FRFIs to start building the necessary capability to measure, monitor and assess climate-related financial risks at the necessary level of granularity.”

Meanwhile, OSFI has aligned its proposed climate-related disclosures with those of the International Financial Reporting Standards (IFRS).

Minimum disclosure expectations are broken down into four main areas — including governance, strategy, risk management, and metrics and targets. P&C insurers will be required to answer questions and report on each of these areas.

In the governance area, OSFI is asking questions about who is responsible for overseeing and managing climate-related risks. Strategy encompasses listing strengths, weaknesses and opportunities around climate risk, and how the business model could change to account for the risk. Risk management asks questions about how climate risks are prioritized, while metrics and targets ask for specifics on the metrics used to assess climate risks.

Feature image courtesy of iStock.com/Tanankorn Pilong