In June of this year the inaugural Milliman Climate Benchmarking Survey: South Africa was launched to help participating insurers benchmark their approaches in the local market toward managing climate-related risks. This was also an opportunity to develop an understanding about how far the South African market has progressed on its climate risk management activity and anticipated climate regulations.

Introduction

Earlier this year the Prudential Authority (PA) of South Africa issued two Guidance Notes¹ addressing climate considerations for insurers. This guidance underscores the increasing recognition of climate-related risks and their potential impacts on the insurance industry. Four critical topics were covered by the Guidance Notes: governance, risk management, the Own Risk and Solvency Assessment (ORSA) and disclosure. This framework aims to encourage insurers to integrate climate-related considerations into their business strategies, risk management processes and reporting mechanisms.

Milliman conducted a climate benchmarking survey to assess the current state of climate activity within the South African insurance industry. This summary presents key findings from the survey results, providing insights into how insurers are responding to the PA's guidance, and identifying areas for improvement.

About the survey

To gauge the industry’s progress, the Milliman survey assessed how closely the adoption of general climate-related risk management activities aligned at a high level to the PA Guidance Notes. As a result, the survey was split into four main sections: Overview, Governance, Risk Management and Disclosures. The aim of the survey is to understand how much progress has been made in the South African insurance industry on this topic, as well as to understand the extent to which insurers have aligned to the PA’s Guidance Notes given that, at this stage, they are not mandatory.

Fifteen insurers participated in the survey with representation across life insurance, non-life insurance, linked insurance and reinsurance and across a range of sizes by gross written premium (GWP).

In general, we observed that the larger insurers have made more progress in their climate-related risk management activities, with non-life insurers slightly more advanced in their risk consideration activities. We plan to increase the number of participants in the survey in future years to provide more industry-specific insights. We also anticipate that the focus of future surveys will evolve as the South African market matures in embedding climate-related approaches and when the PA Guidance Notes become mandatory as anticipated.

Survey findings

Overview

The survey results reveal a mixed level of progress and compliance readiness among South African insurers. Larger insurers by GWP have already begun implementing the PA's guidance, with some smaller outliers ahead of their peers. Many insurers are treating the Guidance Notes as mandatory and plan to implement them within the next 12 to 24 months. Insurers that responded they consider the guidance as not yet mandatory intend to implement only some of the recommendations until regulations are enforced.

Globally, where climate regulations have been in force for a number of years already, wider sustainability considerations are now being considered. There is scope for South African insurers to leapfrog this experience by embedding climate and sustainability considerations simultaneously. Around half of respondents indicated that they are already considering broader sustainability factors.

Governance

One of the key questions in the survey was whether the board had an approved climate strategy. Insurers with a board-approved climate strategy reported a more comprehensive consideration of climate risks across various risk categories. These organisations also demonstrated greater coordination among functions involved in climate considerations and better alignment between the board's and the respondents' views on climate-related risks. However, only a small sample (20%) have implemented a board-approved climate strategy, with another 50% in the process of developing one.

An organisation’s climate strategy is key in providing overall direction to the business on how to manage climate-related risks. Without this strategic direction, different functions within the organisation might develop varying approaches towards managing climate-related risk, leading to ambiguity and inconsistency in direction and priorities. In conversations with survey participants, we heard anecdotally how this may already be happening within some organisations where different functions, or senior management and boards, have different views about the risks posed by climate change and the directions to follow.

The PA guidance recommends that board hold the ultimate responsibility for the management of climate-related risks. However, the Board may delegate oversight to a committee, either existing or newly established. For about half of respondents this oversight sits with the Board Risk Committee, with the remainder noting a wide variety of alternatives including Head of Strategy and across more than one committee.

Risk management

Insurers were asked which climate-related risks (transition, physical, reputation and litigation) they consider material over the short, medium, and long term. Transition risk is deemed material across all durations by most respondents, except reinsurers that did not see it as material in the short term. Physical risk is rated as key across all durations, particularly by the non-life industry. Reputation and litigation risks received mixed responses for the short-term to medium-term risk posed but are viewed as long-term risk drivers by most respondents.

As climate-related risk is a cross-cutting and not stand-alone risk, which the PA Guidance Notes also highlight, insurers were asked about the risk categories which have been assessed to understand the impact of climate-related risks. Non-life and composite insurers are mostly considering climate impacts across all risk categories. Larger insurers, on average, are considering climate impacts across a wider range of risk categories. However, asset risk is often considered not applicable, which is surprising given the wide-ranging implications of transitioning to net zero on assets, including from macroeconomic factors. The PA Guidance in particular calls out reputation, asset, liability and strategic risks as areas to explore. From our experience in other markets, which have made more progress in managing climate-related risks, we have also seen credit, operational and underwriting risks to be areas of interest. During conversations with survey participants the availability of reinsurance and the existential risk to the insurance industry were also topics that were raised, particularly as it was felt by participants that the South African government may not have capacity to backstop some of these stranded risks.

A significant 60% of respondents are already engaging in climate scenario analysis in some form, with an additional 30% planning to start within the next year. During our conversations with respondents, we observed a wide range of maturity in climate scenario analysis, an area we intend to explore further in future surveys.

The main challenges highlighted in conducting climate scenario analysis are relevant data, time horizon applicability, knowledge and expertise and modeling capabilities. Despite these challenges, we observed that organisations that have already begun scenario analysis reported fewer challenges. This suggests that, as organisations get started with scenario analysis, there are some challenges that may be easier to overcome. We anticipate some challenges will remain a concern for some time, for example relevant data, therefore it is advisable to begin and clearly state limitations. Beginning qualitatively with scenario analysis can provide useful insights for exploring uncertainties without the need for advanced modelling capabilities initially.

Disclosure

The survey explored the extent to which insurers are currently tracking and disclosing climate-related metrics. Tracking of internal climate metrics was most prevalent among non-life insurers and the largest insurers by GWP. Disclosures primarily relate to scope 1, 2 and 3 emissions, with metrics such as carbon emissions, reinsurance arrangements, weather events and climate exposures tracked internally. However, climate disclosures are still in the beginning stages for the South African insurance industry and therefore it is a topic we will explore in more detail in future iterations of this survey.

Summary

The survey results indicate that, while most South African insurers are at the starting point of considering climate-related risks, larger insurers and non-life insurers are slightly more advanced. Physical and transition climate-related risks are considered material across all durations, whereas reputation and litigation risks currently have mixed responses. Despite challenges, the majority of respondents are performing, or plan to perform, climate scenario analysis. Climate disclosures are still nascent, but there is a growing recognition of the importance of tracking climate-related metrics internally initially, before reporting externally.

As the industry continues to evolve, it is crucial for insurers to align their strategies with the PA's guidance, ensuring robust governance, comprehensive risk management, and transparent disclosures. By doing so, they can better manage the risks and opportunities presented by climate change, ultimately contributing to a more sustainable and resilient insurance industry in South Africa.

¹ Guidance Notice 1, Climate-Related Governance and Risk Practices for Insurers is available at https://www.resbank.co.za/content/dam/sarb/what-we-do/prudential-regulation/climate-related-risk/2024/G1%20Insurers%20Climate%20Guidance_Risk.pdf.
Guidance Notice 2, Climate-Related Disclosures for Insurers is available at https://www.resbank.co.za/content/dam/sarb/what-we-do/prudential-regulation/climate-related-risk/2024/G2%20Insurer%20Climate%20Guidance_Discl.pdf.