Pay policy at insurers and reinsurers must be consistent with the objectives of their business and risk strategy, culture and values around climate change risk, the Central Bank says.
Boards, committees and senior management at insurance related firms must also understand and consider the risks that climate change poses to their organisations, the regulator says.
In a new guidance document for insurers and reinsurers about the risks posed by climate change, the Central Bank also says boards are ultimately responsible for setting risk appetite and making sure that all risks, including climate change risks, are effectively identified, managed, and controlled.
"The Central Bank expects that a (re)insurer's approach to climate change risk forms part of its overall culture, is embedded into the business model and overall organisational structure and is adopted through their strategy," the document states.
"The 'tone from the top’ is expected to be one that places appropriate emphasis on climate change risk."
"The board and senior management, through their work on business strategy; risk appetite; underwriting; and operational resilience planning, are expected to consider climate change risks and the outputs of scenario/stress analysis over the short, medium and longer-term horizon."
The bank adds that such decisions, discussions and points for further actions must be adequately documented in the minutes of the board.
Responsibility for identifying and managing financial and operational risks arising from climate change must be allocated to relevant senior managers, it says, and their duties and responsibilities clearly documented and understood.
All key functions must appropriately contribute to the board’s decision making by communicating the exposure to material climate change risks, the guidance also says.
Insurers and reinsurers also need to establish a baseline climate change scenario which describes their view of future development of climate change.
The firms also need to consider their current strategy and business model to understand their potential exposure to climate change risk and consider how risk exposure might evolve.
"The Central Bank expects (re)insurers to use an appropriate level of scenario analysis to assess the financial impact of any material Climate change risks are complex risks having direct and indirect effects, which are impacted by local, global physical and socio-economic events, and vary from region to region and sector to sector," the document also says.
Where material exposure is identified, a quantitative assessment of the impact of a baseline climate change scenario over the short, medium and long-term needs to be considered.
The Central Bank also said it expects insurance firms to assess the potential impact of climate change risk on market, credit, and liquidity risk related to their investments and the potential for climate change to impact the long-term investment returns from their portfolio.
The publication of the guidance came as the bank also published its first annual climate-related financial disclosures of its own investment assets.
It shows the emissions profile of the €13.3 billion portfolio of in-scope investments has remained relatively stable over the three years between 2020 and 2022.
The bank has set a long-term target to align its euro-denominated investment assets with the decarbonisation objectives of the EU and the State.
The bank has also published its Climate Action Roadmap which lays out the steps it is taking to become a more sustainable organisation.
