13 September 2024

FINMA Circular 24/xx "Nature-related financial risks": Insurance companies are also required to act!

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  • Legal
  • Banking / Insurance
  • Governance / ESG

The new FINMA Circular "Nature-related financial risks" aims to define and specify FINMA's supervisory practice with regard to the management of nature-related financial risks by financial institutions. The aim is to strengthen the resilience of supervised institutions to these risks, which result from physical changes in nature such as climate change and the loss of biodiversity.

  • Adrian Peyer

    Legal Partner

Insurance companies are also required to act!

The requirements are based on the Principles for the effective management and supervision of climate-related financial risks of the Basel Committee on Banking Supervision1 (BCBS) and the Application Paper on the Supervision of Climate-related Risks in the Insurance Sector of the International Association of Insurance Supervisors (IAIS). They are principles-based, proportional and technology-neutral.

In particular, the requirements are not aimed at influencing an institution's investment, lending or underwriting decisions or making them more sustainable. However, they do aim to ensure that these decisions are made on a sound basis, taking into account the relevant short, medium and long-term nature-based financial risks.

1. What risks are covered?

FINMA takes a broad approach to the risks covered, taking into account all potentially relevant nature-related risk drivers in addition to climate change. This is because other natural risks, such as the loss of biodiversity and the resulting impairment of ecosystem services, also influence the economy and the financial system and represent a serious source of financial risk. Climate and natural risks are also closely linked. In FINMA's integrated understanding, climate-related financial risks should be viewed as a sub-category of nature-related financial risks.

Nature's services (also known as "ecosystem services" or "natural capital") are often taken for granted and are hardly taken into account or priced into current models. In particular, the crossing of tipping points and the irreplaceability of many ecosystem services are not covered in traditional risk management approaches. Dealing effectively with the risks requires non-linear thinking and, particularly due to the medium to long-term transition, forward-looking analysis approaches with a longer horizon.

Of particular importance with regard to the impact of natural risks on financial institutions are the legal and reputational risks that arise. These can arise from both physical and transition risks and are often a combination of the two. Due to the particular significance of legal risks, these are often managed as a separate category alongside physical and transition risks. The risks can arise in particular from lawsuits (e.g. from NGOs, climate activists) against counterparties of financial institutions, whereby it is to be expected that the lawsuits currently focused heavily on climate aspects will increasingly also be devoted to broader aspects of nature and will also be brought directly against financial institutions. Furthermore, increasing regulation (e.g. with regard to due diligence obligations in supply chains) will also result in rising legal risks and, with increasing transparency, increasing reputational risks. The latter go hand in hand with legal risks (e.g. due to a legal case that attracts media attention), but can also arise independently (e.g. if a company or financial institution falls into disrepute through association with behavior that damages the environment). In particular, the issue of greenwashing also leads to legal and reputational risks.

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The principle of materiality also applies to nature-related financial risks. The assessment of the materiality of these risks is specific to each institution. As with all risks, the institutions themselves define the procedure and criteria for determining material nature-related financial risks. In the area of natural risks, the identification of material risks is a major challenge for the institution due to the complexity and novelty of the topic. There are still no widely established procedures. International reporting standards (e.g. ISSB, ESRS) and frameworks (e.g. TNFD), together with practical experience, provide established approaches for the procedure, although these will continue to develop, as will the topic as a whole. Accordingly, it is also expected that the institutions' approach will adapt to relevant environmental developments.

Dealing appropriately with this complexity requires the identification of severe future scenarios and the performance of scenario analyses.

Scenario analysis is a tool for understanding and examining how the future could develop under uncertain conditions. It involves constructing severe scenarios and analyzing how resilient a company's current business model and strategy would be if it found itself in these scenarios.

2. What are the most important new requirements for insurance companies?

The risk situation of insurance companies differs significantly from that of banks, as non-life insurance and reinsurance companies primarily have physical risks on the liability side in addition to transition risks. These are already identified, measured and managed in exposed areas by the insurance companies concerned and supervised by FINMA.

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However, a concretization by means of circulars also allows for more effective and efficient supervision for the supervised parties in this respect.

In particular, the following requirements apply to insurance policies:

  • Concretization of the supervisory practice:
    Insurance companies need to integrate nature-related financial risks more strongly into their risk management processes. This includes physical risks such as natural disasters and transition risks arising from the transition to a more environmentally friendly economy.
  • Extended governance requirements:
    Insurance companies must integrate nature-related financial risks into their governance structures and clearly define responsibilities.
  • Scenario analyses:
    Insurance companies are required to carry out scenario analyses in order to assess the impact of various natural changes on their business activities.
  • Materiality assessment:
    Insurance companies are expected to independently assess the materiality of nature-related risks and integrate them into their risk strategies.

3. What actions are required by insurance companies?


  • Integration in risk management:
    Insurance companies must adapt their existing risk management systems to effectively identify, assess and monitor nature-related financial risks, particularly in the following areas:
    • Type and structure of insurance cover;
    • Pricing, underwriting;
    • Management and monitoring of insurance risks, including risk concentrations, correlations and accumulations; and
    • Claims reserving
  • Carrying out scenario analyses:
    There is a need to develop specific scenarios that reflect the impact of natural changes on the solvency and liquidity of insurance companies.
  • Documentation and reporting:
    Insurance companies are obliged to regularly document their findings and the materiality of the identified risks and integrate them into their reporting processes. For example, the results of the materiality assessment must be documented and reported to the Executive Committee and the Board of Directors.
  • Responsible Actuary:
    As nature-related financial risks can affect the existing risk categories of insurance companies as risk drivers, these also affect the tasks of the responsible actuary as defined by supervisory law.
  • Own Risk and Solvency Assessment (ORSA):
    If the insurance company is exposed to material nature-related financial risks, these are taken into account as part of the ORSA. The effects of nature-related financial risks on the business model, strategy, risk profile, solvency and other key perspectives are examined.
  • Training:
    There is a need for further development of expertise within the organizations in order to be able to deal with the complex and uncertain nature-related risks.

4. Transitional periods

The circular is scheduled to enter into force on January 1, 2025.

Institutions in categories 1 and 2 must fulfill the requirements for risk identification, materiality assessment and scenario analyses as well as for aligning their business strategy with their commitments as soon as the Circular enters into force.

These requirements should already be met by the institutions concerned due to other regulatory requirements (FINMA Circulars 16/1 and 16/2) and international drivers (e.g. reporting in accordance with the TCFD) and therefore do not require a further transition period.

A transitional period of one year from the entry into force of the Circular is provided for Category 1 and 2 institutions to meet all other requirements.

In order to ensure that the requirements of the circular are proportionate, longer transitional periods apply in some cases for the implementation of the requirements for institutions in categories 3 and 5.

According to FINMA, institutions in the small banks and small insurers regime, securities firms and asset managers are exposed to lower risks overall and are therefore exempt for reasons of proportionality. However, nature-related financial risks can also have an impact on these institutions. FINMA therefore recommends that these institutions be guided by the Circular.

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