ClientEarth reports three UK insurers to the FCA for climate risk failure

August 16, 2018

By Stephanie Morton, Insurance Lawyer, ClientEarth

ClientEarth has reported three insurance companies to the Financial Conduct Authority for failing to disclose climate change-related risks in their annual reports. The three insurers targeted are Admiral Group plc, Lancashire Holdings Limited and Phoenix Group Holdings.

The complaints, available on ClientEarth’s website, include an extensive discussion of the general risks which climate change poses to the insurance sector. They also explore specific risks which climate change may pose to each target insurer based on their business model.

The risks discussed in the complaints fall into four main categories:

  • Physical risks from climate change, which are likely to result in more claims as well as a reduction in the value of insurers’ assets.
  • Transition risks caused by changing consumer preferences, technological advances, and new governmental policy could also reduce the value of their investment portfolios. These are illustrated by a range of examples drawn from recent research, including a discussion of the high risk of asset stranding within the coal industry. For instance, 54% of operating coal capacity in Europe is cash flow negative today, and this is set to increase to 97% by 2030.
  • Liability risks if losses are suffered as a result of climate risks and insurance companies find themselves on the hook for third-party liability claims against their corporate customers.
  • Reputational risk for the insurance sector as the role it plays in underwriting and financing the fossil fuel sector comes under increased public scrutiny. The complaints discuss the Unfriend Coal campaign who estimate that nearly half of the global reinsurance market are now divesting from coal. As increasingly ambitious policies are adopted, further pressure will build for laggards who may find it challenging to justify their inaction.

Furthermore, the complaints emphasise that these risks are interrelated which may amplify their severity. In many cases climate change may affect both sides of insurers’ balance sheets, thereby making them particularly vulnerable. Against that backdrop, the complaints address the ill-conceived notion that insurers can manage climate risks through annual repricing and the withdrawal of coverage alone.

The complaints conclude that climate change is a principal risk or uncertainty affecting the target companies. As a result they are legally obliged to report this in their annual reports in accordance with the Disclosure Guidance and Transparency Rules. Despite this, none of the target companies mention climate change in their annual reports.

Depending on the outcome of their investigations, the FCA could fine or publicly censure the insurers as a result of the complaints. The companies could also be made to publish information which rectifies the omissions in their annual reports.

The FCA recently responded to the Environmental Audit Committee’s Green Finance report, listing proactive steps it was taking with regard to climate change-related disclosures.

As part of this, the FCA said that it will “highlight to issuers the need to make adequate disclosures regarding materially important information, including information that allows investors to understand how ESG matters affect the valuation of a listed company’s securities and how these matters are managed by the company.”

It remains to be seen whether the FCA now takes this opportunity to do so.

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