Case Studies

The California Department of Insurance (CDI) is a leading insurance supervisor, facilitating regulation for sustainable insurance for over more than 100 years. With more than 1,300 licensed insurance companies and USD $289 billion in premium payments per year, the State of California is the largest insurance market in the United States and the sixth largest in the world.¹ Under the leadership of the Insurance Commissioner David Jones, the CDI has launched a series of reforms to align the insurance sector with sustainable development objectives. The CDI was one of earliest supervisors to join the UN PSI, and it is the founding chair of the UN’s Environment Sustainable Insurance Forum, an important international platform that allows global insurance regulators to coordinate in promoting sustainability.

Following an effort to assess climate change impacts on California insurers in early 2016, the CDI established the Climate Risk Carbon Initiative, which includes disclosure requirements for insurers on investments in fossil fuel enterprises. Specifically, the CDI requires California-licensed insurance companies to:

• Voluntarily divest from thermal coal enterprises (“CDI Thermal Coal Divestment Request”)
• Publicly disclose insurers’ investments in fossil fuel enterprises (thermal coal, oil, gas, and utilities) through a survey or “data call,” which is applied to California licenses whose 2015 direct written premiums are no less than USD $100 million nationwide (“CDI Fossil Fuel Data Call”).²

The CDI was the first insurance regulator in the United States to ask insurers to report detailed information on their investments in fossil fuel enterprises and call for divestment from thermal coal. Moreover, Commissioner Jones is a strong supporter of strengthening international practice on climate-related risk disclosure in the insurance sector. In his comment letter to the Task Force on Climate-related Financial Disclosure (TCFD) in February 2017, Jones expressed his concern for making the disclosure obligation “voluntary,” as many insurance companies may refuse to disclose climate risks affecting their business. According to an analysis of the CDI’s experience in voluntary and mandatory disclosure obligations, Jones found that voluntary disclosure requirements do not lead to “widespread adoption” of disclosure. In response, he has urged the Task Force to call for mandatory disclosures and proposed that the Task Force’s formal recommendations be amended to call for mandatory disclosure.³

In May 2018, California became the first state in the United States to conduct climate-related financial risk stress tests and analyses of insurance company investments in fossil fuel.⁴ “The climate-related financial risk to insurers’ investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored,” Commissioner Jones said in a statement. “As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments.”⁵ The CDI partnered with the 2° Investing Initiative to conduct the scenario analysis. The results of the analysis have been published in the report Assessing Climate Change Transition Risk in Insurer Portfolio, which concludes that insurance companies in California are heavily exposed to thermal coal risks. The CDI has proposed that insurers need to reduce installed coal capacity across their equity and bond portfolios by at least 20 percent over the next five years.⁶

The Autorité de Contrôle Prudentiel et de Résolution (ACPR) has taken active posture in incorporating ESG considerations into insurance sector governance. In the wake of the adoption of the Paris Agreement by 195 countries at the COP21 climate conference in 2015, France passed the Energy Transition Law, marking a significant milestone of France’s low-carbon strategy. In particular, the provision of Article 173 introduced mandatory carbon disclosure requirements for insurers and specified reporting obligations for insurance companies of different sizes.

• Smaller insurance entities (below €500m) are required to provide a full description of their investment policy relating to ESG issues and internal risk management practice relating to these issues.
• Larger insurers (above €500m) are required to provide detailed information on internal analysis methodology and how outcome of the analysis is incorporated into investment decisions.

The French regulator’s approach to disclosure obligations allows some flexibility for investors meeting reporting requirements. According to a July 2018 report by IAIS, around two thirds of insurers in France have reported their climate-related risks exposure while further assessment of disclosure process will be included in a government report due at the end of 2018.

In addition, France has integrated carbon risks into their existing stress-testing process as “the fifth paragraph of the article 173 required the government to report about regular stress-testing scenarios representative of climate related risks.”⁷ Results of a recent analysis by ACPR found significant insurers’ exposure to transition risks, “between €240bn and €450bn of assets (that is 10-20 percent) would be issued by entities from sectors exposed or potentially exposed to transition risks.”⁸ The ACPR has also been actively engaging domestic stakeholders in the process of consultations and policymaking—organizing various activities and seminars with insurers and banks to promote awareness of climate-related risks and their impact on the financial sector. It is also a founding member of the SIF.

Green finance is at the center of China’s sustainable development plans. At the 19th Party Congress on October 18, 2017, Chinese President Xi Jinping vowed to accelerate green development in China, stating that China would continue to work with other countries to tackle climate change and boost low-carbon development.⁹

China’s insurance regulator, the China Banking and Insurance Regulatory Commission (CBIRC), was formally created in Beijing on April 8, 2018 as a result of the reform to merge the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC). Just as the CIRC that preceded it, the CBIRC has been taking an active approach in incorporating ESG issues in their regulatory approach, with a focus on promoting green insurance products.

In August 2016, seven Chinese ministries issued high-level official guidelines on building a green financial system (“关于构建绿色金融体系的指导意见”) and called for the creation of a “green insurance” market. Specifically, the guidelines highlighted the need for a compulsory environmental pollution liability insurance framework. Following up on this guideline, the CIRC and the MEP released draft regulation in June 2017 that proposed “making environmental pollution liability insurance compulsory for heavy polluters, including oil and gas companies.”¹⁰ In May 2018, the draft regulation was approved by the Ministry of Ecology and Environment. Regulators’ push for green insurance product development is believed to reduce expensive costs associated with pollution incidents. According to Caixing, pollution costs accounted for up to 3 percent of China’s Gross Domestic Product (GDP) from 2004 to 2012.

The Chinese regulator has also encouraged insurers to invest in low-carbon projects. For example, in a guideline on supporting green bond development released in March 2017, the CSRC encouraged insurance companies to increase their investment in green bonds. Moreover, China has actively cooperated with international partners to promote sustainable insurance. A China-UK pilot project was established by China Green Finance Committee, the City of London Green Finance Initiative and the Principles for Responsible Investment (PRI) on disclosure obligation aligned with recommendations of Task Force’s TCFD. According to the Green Finance Initiative, “this is the first TCFD pilot for China and will inform the direction of China’s environmental disclosure guidelines, enabling China-UK exchange on effective implementation of TCFD.”¹¹ The Chinese government endorsed the pilot at the UK-China Economic and Financial Dialogue.