## Technical Note — Netherlands: Climate-Related Risks in Banks and Insurers (content unit 1nldea2024008)

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---

### Executive summary and scope
- Review purpose:
  - The Technical Note reviews the approach to supervision and disclosure of climate-related risks in Dutch banks and insurers as part of the 2024 Financial Sector Assessment Program (FSAP).
  - Benchmarks: Basel Committee’s June 2022 Principles for banking supervision and IAIS Application Paper on the Supervision of Climate-related Risks of May 2021.
  - Review based on regulatory framework and supervisory practices in place as of November 2023, and meetings with DNB, AFM, MoF, and other stakeholders.

- High-level findings:
  - Dutch financial institutions face exposures to both physical and transition climate risks.
  - Physical risks: mostly represented by flood risk.
  - Transition risks: driven by the structure of the Dutch economy, including significant exposure to agriculture.
  - Geographic vulnerability statistics:
    - "About 60 percent of the land surface in the Netherlands is vulnerable to flooding from the sea, the large rivers, and lakes."
    - "Nearly 26 percent of the surface in the Netherlands is below sea level."
  - Flood-protection framework highlights:
    - Environment and Planning Act (De Omgevingswet) and the Delta Programme with a Delta Programme Commissioner.
    - Risk-based flood legislation since 2017 aiming by 2050 to limit the probability of mortality due to flooding behind the dikes to no more than 1 in 100,000 per year (or 0.001 percent).
    - Planned upgrades to approximately 1,500 kilometers of dikes and over 400 engineering structures.

### Exposures and vulnerabilities (real estate, banking, insurance, pension funds)
- Real estate exposure:
  - Total exposure to real estate: EUR 700bn.
  - Share of domestic real estate exposures in areas vulnerable to flooding:
    - Banks: 52 percent.
    - Insurers: 66 percent.
    - Pension funds: 65 percent.
  - Most areas protected by flood defenses; failure of dikes could cause substantial damage.

- Banking exposures and transition risk:
  - Estimated banking sector exposure to high nitrogen-emitting sectors: EUR 34 billion in domestic loans.
    - This constitutes 6.5 percent of total loans and 1.5 percent of total assets.
  - Nitrogen emission intensity metric: measures nitrogen emission per unit of value-added and is weighted by bank exposure; recent decline mainly due to policy interventions and agents’ efforts rather than portfolio shifts.

- Insurance exposures and natural perils:
  - Insurance sector exposure concentrated in non-life underwriting.
  - Most important domestic natural perils: windstorms, hail, and floods.
  - Historic insured losses (selected events, Insured Loss EURm):
    - 06/23/2016 — Hail — 667
    - 02/18/2022 — Storm — 611
    - 01/18/2018 — Storm — 538
    - 01/18/2007 — Storm — 332
    - 10/28/2013 — Storm — 211
    - 08/30/2015 — Hail — 121
    - 06/22/2008 — Hail — 118
    - 07/15/2021 — Flood — 115
    - 07/14/2021 — Flood — 109
    - 05/26/2009 — Hail — 106
    - 02/09/2020 — Storm — 104
    - 08/31/2015 — Hail — 84
    - 02/19/2022 — Storm — 83
    - 07/28/2014 — Rain — 81
    - 06/18/2021 — Storm — 80
    - 01/03/2018 — Storm — 78
    - 06/28/2011 — Hail — 75
    - 03/31/2015 — Storm — 73
    - 05/10/2019 — Storm — 68
    - 05/29/2018 — Rain — 67
  - Limburg July 2021 event: insured losses in the Netherlands around EUR 250m (most severe flood event in recent decades).

- Flood risk typology relevant for modeling and policy:
  - Type A: inundation outside diked areas.
  - Type B: breach of primary flood defenses (shore or major rivers); not insured by private insurers; compensation provided by the government.
  - Type C: breach of non-primary flood defenses (along smaller rivers); largest exposure for property & casualty insurers.
  - Type D: inundation of regional water systems.
  - Expected loss distributions differ by type; particularly fat tails for Type C.

### Insurer scenario analysis and solvency impact (selected results)
- Scenario: repetition of the 2021 Limburg flood with assumed 25 percent increase in maximum precipitation:
  - Text: Would result in net claims of EUR 180m for the sample of five large property & casualty insurers.
  - Figure caption: Similar estimate of around EUR 190m net claims for insurers in the sample (figure annotations).
  - SCR effect: SCR ratio for the median insurer would drop by less than 5 percentage points to 153 percent (text).
- Non-primary flood coverage (Type C) causes highest losses; reinsurance significantly limits net claims for Dutch primary insurers.
- Scenarios reported include Expected 2023, 1-in-100y AEP, 1-in-200y AEP, 1-in-500y AEP, 1-in-1,000y AEP with Gross and Net Claims (EUR millions) and SCR Coverage Ratios (percent).

### Assessment of supervisory response, capacity, and practice
- Regulatory context:
  - Banking and insurance climate-risk supervision builds on EU frameworks (CRD/CRR, EBA measures/guidelines) and the ECB Guide on Climate-related and Environmental Risks for SIs.
  - Solvency II Commission Delegated Regulation amendment (2021) requires insurers to consider sustainability risks in underwriting and reserving and to identify, assess and manage sustainability risks relating to the investment portfolio (Article 260 S II CDR). Responsibilities specified for risk management (Art. 269) and actuarial function (Art. 272); remuneration policy must include sustainability risk integration (Art. 275).
  - DNB published “Guide to managing climate and environmental risks” in March 2023.

- DNB activities and strategy:
  - CSR Strategy 2019-2025; 2021-2025 Sustainable Finance Strategy aiming to integrate sustainability into all core tasks by 2025.
  - Sustainable Finance Office (SFO) and Strategic Sustainable Finance Program (SSFP) coordinate strategy and knowledge.
  - DNB integrated C&E risks in LSI supervision as of 2019; insurance integration project group established in 2020; voluntary commitments monitored and reputational consequences communicated.

- Supervisory practice and tools:
  - Annual thematic reviews based on institutions’ self-assessments; LSI reviews began in 2019 and benchmarked to the ECB Guide since 2021; insurance reviews started in 2023.
  - Sector-level press releases, individualized management letters, action plans, and follow-ups.
  - DNB anchors climate risk supervision on existing powers (Financial Supervision Act Wft Sections 1:24, 3:17, 1:28) and focuses on material climate-related risks.

- Capacity and resource constraints:
  - Need to bridge conceptual challenges, fill data gaps, and strengthen supervisory capacity.
  - Resource pressures due to significant participation in EU and international initiatives; growing demands to supervise complex approaches require gradual increase in human resources.

### Priority areas and supervisory tool development
- Integrate quantitative approaches:
  - Need to further intertwine available quantitative approaches, scenario analysis, and stress testing through supervisory tools and knowledge transfer within DNB and to industry.

- Map and address data gaps:
  - "Gaps in available climate data sets should be mapped, and initiatives to expand and improve available data should be supported."
  - Financial institutions should be requested to collect data available from their clients.

- Leverage disclosures:
  - First mandatory disclosure submissions should be jointly evaluated by AFM and DNB; lessons learned to be discussed with financial institutions and auditors, and improvements urgently articulated.

- DNB operational proposals:
  - Develop a dashboard for LSI supervision using supervisory reporting combined with external ESG providers (MSCI, ISS ESG).
  - Current indicators: weighted average carbon intensity (WACI), exposure to transition sensitive sectors, exposure to companies with ‘fossil activities’.
  - Limited look-through information on investment funds noted; additional data collection possible with expanded DNB powers and EU reporting amendments.

### Disclosure and data (EU context, Dutch initiatives, gaps)
- Disclosure frameworks and EU reforms:
  - Early adoption of TCFD and use of PCAF standards by Dutch institutions.
  - NFRD being replaced by CSRD and ESRS.
  - SFDR requires transparency on sustainability characteristics of financial products.
  - EBA’s ESG Pillar 3 disclosures came into force for large institutions end-2022; CRR3 will extend EBA Pillar 3 ESG disclosures to all banks by 2025 with proportionality measures 2023–2025.
  - AFM plans to review first CSRD mandatory corporate climate disclosures; AFM and DNB could jointly evaluate initial lessons learned.

- Data initiatives, tools, and gaps:
  - Pan-EU projects: EUCLID, EBA Pillar 3 hub, ESAP; ECB published climate-related statistical indicators in 2023; EIOPA dashboard on insurance protection gap and CLIMADA-App open-source application.
  - Dutch data sources (examples):
    - RVO: Warmteatlas.nl; Open data Dutch government; EP-online energy labels.
    - Nationaal Georegister: water quality datasets.
    - Klimaateffectatlas: maps on flooding, waterlogging, drought and heat.
    - Regionale klimaatmonitor: core dataset combining CBS and RVO indicators.
    - Klimaatschademonitor: historic insured losses from Dutch Insurance Association.
  - Layered data issues: gaps, mismatched formats/granularity, availability limited to some institutions, outdated public data, model divergence across insurers.
  - Proposal to create a working group to review data needs and sources, potentially led by an inter-agency body as in Recommendation 1.

### Key recommendations (selected, preserved verbatim with addressees, priorities, timeframes, and paragraph refs)
- National Coordination
  - 1. Establish an interagency body – or facilitate this in an existing platform – to regularly discuss policy implications of climate-related issues, broaden cooperation including data sharing, and coordinate policy actions with implications for financial stability. Addressee: MOF and other relevant ministries. Priority: H. Timeframe: ST. (¶12)

- Supervisory Responsibilities, Powers, and Functions
  - 2. Further elaborate DNB’s Sustainable Finance Strategy in individual departments’ medium-term plans and strengthen systematic and coordinated development of sectoral agendas. Addressee: DNB. Priority: M. Timeframe: MT. (¶32)

- Supervisory Resources and Capacity
  - 3. Align resources allocated to direct climate risk supervision with the ambitious strategy, and periodically reflect on further growing capacity demands. Addressee: DNB. Priority: M. Timeframe: ST. (¶35)
  - 4. Develop a mandatory program that would systematically enhance and regularly update the expertise of supervisors in climate-related risks area. Addressee: DNB. Priority: M. Timeframe: MT. (¶38)

- Supervisory Approach, Tools, and Technique
  - 5. Establish a medium-term plan to develop LSI/insurance climate risk supervision which would include specific milestones and outline resource demands with the aim to incorporate climate-related risk perspective across activities of the supervisory process. Addressee: DNB. Priority: H. Timeframe: ST. (¶43)
  - 6. Explore opportunities for joint projects involving both supervisors and stress testers. Addressee: DNB. Priority: H. Timeframe: ST. (¶47)
  - 7. Deepen collaboration among DNB supervisors and DNB stress testers on climate risk supervision to (i) extend quantitative supervisory analyses, (ii) develop supervisory capacity to evaluate modelling approaches used by financial institutions, (iii) inform DNB’s stress testing programs with insights of supervisors. Addressee: DNB. Priority: H. Timeframe: ST. (¶50)

- Supervisory Expectations on Management of Climate-Related Risks
  - 8. Explain application of the proportionality principle for individual sections of the ECB Guide and the DNB Guide, for both internal and external users. Addressee: DNB. Priority: M. Timeframe: MT. (¶54)

- Disclosure and Data
  - 9. Summarize and communicate initial lessons learned from first mandatory climate-related disclosures; continue a regular exchange of experience among authorities on climate-related disclosures and include major counterparts. Addressees: AFM, DNB. Priority: M. Timeframe: ST. (¶67)
  - 10. (a) Continue mapping systemic gaps in available climate data sets and explore possibilities to support initiatives focused on strengthening climate-related data sets used by financial institutions for risk management and disclosure. (b) Further strengthen the engagement with financial institutions on the necessity to support their risk management by collecting consistent and granular data and disclosure which is available from their clients. Addressees: AFM, DNB. Priority: H. Timeframe: MT. (¶73)

### Implementation emphasis and sequencing for supervisors
- Authorities should translate strategic measures into a concrete roadmap with milestones and resource estimates to ensure systematic and ambitious progress.
- Financial institutions should prioritize implementing supervisory expectations where interpretation is clear and the effect is substantial (example: governance requirements).
- Supervisors should subject implementation of regulatory requirements by financial institutions to routine reviews across the supervisory practice.

*Source: EXECUTIVE SUMMARY and chapter excerpts from the Technical Note prepared in the context of the 2023 Netherlands Financial Sector Assessment Program (FSAP), based on regulations and supervisory practices as of November 2023 (content unit 1nldea2024008).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Introduction
- The Technical Note reviews the approach to supervision and disclosure of climate-related risks in Dutch banks and insurers as part of the 2024 Financial Sector Assessment Program (FSAP).
- Benchmarks used: Basel Committee on Banking Supervision’s June 2022 Principles for banking supervision and IAIS Application Paper on the Supervision of Climate-related Risks of May 2021 for insurance oversight.
- The review is based on the regulatory framework and supervisory practices in place as of November 2023, drawing on regulations, market analyses, and meetings with DNB, AFM, MoF, and other stakeholders.

### Key findings on exposures and risks
- Dutch financial institutions face exposures to both physical and transition climate risks.
  - Physical risks: mostly represented by flood risk.
  - Transition risks: primarily driven by the structure of the Dutch economy, including significant exposure to agriculture.
- Geographic vulnerabilities:
  - "About 60 percent of the land surface in the Netherlands is vulnerable to flooding from the sea, the large rivers, and lakes."
  - "Nearly 26 percent of the surface in the Netherlands is below sea level."
- Flood-protection framework:
  - The legal framework: Environment and Planning Act (De Omgevingswet) and the Delta Programme with a Delta Programme Commissioner.
  - Risk-based flood legislation since 2017: aims by 2050 to limit the probability of mortality due to flooding behind the dikes to no more than 1 in 100,000 per year (or 0.001 percent).
  - Planned upgrades to approximately 1,500 kilometers of dikes and over 400 engineering structures.

### Assessment of supervisory response and capacity
- Dutch authorities (DNB and AFM) have contributed significantly to EU regulatory development and applied these frameworks domestically.
- Supervisory efforts:
  - Proactive research on exposures and design of supervisory tools to assess how financial institutions identify, monitor, and manage climate-related risks.
  - Gradual development of approaches and methodologies; many initiatives have influenced international debate on climate risk supervision.
- Challenges remaining:
  - Need to bridge conceptual challenges, fill data gaps, and strengthen supervisory capacity.
  - Resource pressures due to significant participation in EU and international initiatives, requiring flexible adjustments.

### Priority areas for further development (supervisory tools and data)
- Integrate quantitative approaches more firmly into supervision:
  - "Utilizing scenario analysis and stress testing in the supervisory process": need to further intertwine available quantitative approaches, scenario analysis, and stress testing through supervisory tools and knowledge transfer within DNB and to industry.
- Map and address data gaps:
  - "Gaps in available climate data sets should be mapped, and initiatives to expand and improve available data should be supported."
  - Financial institutions should be requested to collect data available from their clients.
- Leverage disclosures:
  - First mandatory disclosure submissions should be jointly evaluated by AFM and DNB; lessons learned to be discussed with financial institutions and auditors, and urgency of improvements clearly articulated.

### Main recommendations (excerpted and preserved from Table 1)
- National Coordination
  1. Establish an interagency body – or facilitate this in an existing platform – to regularly discuss policy implications of climate-related issues, broaden cooperation including data sharing, and coordinate policy actions with implications for financial stability. Addressee: MOF and other relevant ministries. Priority: H. Timeframe: ST. (¶12)

- Supervisory Responsibilities, Powers, and Functions
  2. Further elaborate DNB’s Sustainable Finance Strategy in individual departments’ medium-term plans and strengthen systematic and coordinated development of sectoral agendas. Addressee: DNB. Priority: M. Timeframe: MT. (¶32)

- Supervisory Resources and Capacity
  3. Align resources allocated to direct climate risk supervision with the ambitious strategy, and periodically reflect on further growing capacity demands. Addressee: DNB. Priority: M. Timeframe: ST. (¶35)
  4. Develop a mandatory program that would systematically enhance and regularly update the expertise of supervisors in climate-related risks area. Addressee: DNB. Priority: M. Timeframe: MT. (¶38)

- Supervisory Approach, Tools, and Technique
  5. Establish a medium-term plan to develop LSI/insurance climate risk supervision which would include specific milestones and outline resource demands with the aim to incorporate climate-related risk perspective across activities of the supervisory process. Addressee: DNB. Priority: H. Timeframe: ST. (¶43)
  6. Explore opportunities for joint projects involving both supervisors and stress testers. Addressee: DNB. Priority: H. Timeframe: ST. (¶47)
  7. Deepen collaboration among DNB supervisors and DNB stress testers on climate risk supervision to (i) extend quantitative supervisory analyses, (ii) develop supervisory capacity to evaluate modelling approaches used by financial institutions, (iii) inform DNB’s stress testing programs with insights of supervisors. Addressee: DNB. Priority: H. Timeframe: ST. (¶50)

- Supervisory Expectations on Management of Climate-Related Risks
  8. Explain application of the proportionality principle for individual sections of the ECB Guide and the DNB Guide, for both internal and external users. Addressee: DNB. Priority: M. Timeframe: MT. (¶54)

- Disclosure and Data
  9. Summarize and communicate initial lessons learned from first mandatory climate-related disclosures; continue a regular exchange of experience among authorities on climate-related disclosures and include major counterparts. Addressees: AFM, DNB. Priority: M. Timeframe: ST. (¶67)
  10. (a) Continue mapping systemic gaps in available climate data sets and explore possibilities to support initiatives focused on strengthening climate-related data sets used by financial institutions for risk management and disclosure. (b) Further strengthen the engagement with financial institutions on the necessity to support their risk management by collecting consistent and granular data and disclosure which is available from their clients. Addressees: AFM, DNB. Priority: H. Timeframe: MT. (¶73)

### Implementation emphasis
- Authorities should translate strategic measures into a concrete roadmap with milestones and resource estimates to ensure systematic and ambitious progress.
- Financial institutions should prioritize implementing supervisory expectations where interpretation is clear and the effect is substantial (example cited: governance requirements).
- Supervisors should subject implementation of regulatory requirements by financial institutions to routine reviews across the supervisory practice.

*Source: EXECUTIVE SUMMARY, Technical Note prepared in the context of the 2023 Netherlands Financial Sector Assessment Program (FSAP), based on regulations and supervisory practices as of November 2023.*

### 8.      Dutch financial institutions are exposed to physical climate risks from floods, due to

### 8.      Dutch financial institutions are exposed to physical climate risks from floods, due to

### Exposure and vulnerabilities
- Total exposure to real estate: EUR 700bn.
- Share of domestic real estate exposures in areas vulnerable to flooding:
  - Banks: 52 percent.
  - Insurers: 66 percent.
  - Pension funds: 65 percent.
- Most of these areas are protected by flood defenses; however, in the event of failure of dikes, a substantial portion of the real estate could be damaged by flooding.
- Climate drivers that can increase impacts over time: sea-level rise and more frequent extreme rainfall.
- Insurance penetration is limited; damages from major flooding are primarily borne by those directly affected and potentially the government.

### Government’s response and national coordination
- National climate objectives:
  - Aim for a 60 percent reduction in carbon emissions by 2030.
  - Economy to be climate-neutral, fossil free, nature-inclusive and fully circular by 2050 at the latest.
  - Commitment to provide incentives for sustainable investments, eliminate greenwashing and promote credible climate action across the financial system (reference to Article 2.1(c) of the Paris Agreement).
- Central management role:
  - Coordinating minister for energy and climate bears ultimate responsibility for achieving the goals in the Climate Act.
  - Individual ministers responsible for defining and executing initiatives within their mandates.
- Minister of Finance sets a strategic agenda specifying state-level objectives for the financial sector, including accelerating the role of financial institutions in financing the transition.
- Sustainable Finance Platform established by DNB to coordinate sustainability initiatives among financial sector representatives, supervisory authorities and government ministries; the platform promotes partnerships and action but lacks formal authority.
- Need for broader coordination:
  - Climate-related risks require policy actions across a wide spectrum of authorities (DNB, AFM, Ministry of Finance, and bodies for economic affairs and climate policy, infrastructure and water management, agriculture, nature and food quality).
  - Recommendation (Recommendation 1): Establish an interagency body – or facilitate this in an existing platform – to regularly discuss policy implications of climate-related issues, broaden cooperation including data sharing, and coordinate policy actions with implications for financial stability.

### DNB strategic initiatives
- DNB’s frameworks and strategies:
  - Five-year Corporate Social Responsibility (CSR) Strategy (CSR strategy 2019-2025) with a long-term goal to identify climate and environmental risks (C&E risks) for the financial sector and encourage appropriate risk management.
  - 2021-2025 Sustainable Finance Strategy setting the ambition to integrate sustainability into all elements of DNB’s core tasks by 2025; for supervision this includes embedding sustainability into supervisory methodology and (digital) processes, applying a forward-looking toolkit to monitor financial stability, monitoring access to financial products and services and ensuring laws and regulations are robust with regard to sustainability.
  - Sustainable Finance Office (SFO) monitors alignment of DNB’s activities with strategic direction.
- Supervisory action:
  - DNB integrated C&E risks in LSI supervision as of 2019 and set up a project group in 2020 to integrate these risks in insurance supervision.
  - 2021 DNB research revealed need to improve financial institutions’ management of climate risks.
  - DNB includes voluntary climate commitments in the supervision of the few LSIs, insurers and pension funds that have signed these commitments and has communicated reputational consequences if commitments are not met.
  - DNB supports integration of ESG risks into the prudential framework at the international level.

### Financial sector initiatives and commitments
- Around 50 banks, insurers, pension funds and asset managers and their organizations committed to contribute to the realization of the Paris and Dutch Climate Agreements.
- Commitments include mandatory reporting on the climate impact of loans and investments from 2020 onwards.
- Four financial umbrella organizations organize workshops and conferences on topics such as measuring carbon footprint of loans and investments and estimating impacts.
- KPMG survey of 50 committing institutions (Box 1) findings:
  - 100 percent of participating financial institutions have a climate action plan published.
  - 96 percent have the ambition to align their portfolio with the 1.5 °C scenario and ‘a net zero’ by 2050 at the latest portfolio.
  - 90 percent have an interim target for 2030.
  - 94 percent have had their action plan approved by the executive board and/or the supervisory board; 78 percent of these use insights to focus action plans on sectors for objectives or actions (engagement or divestments).

### Vulnerability of the financial system to climate risk
- Physical risk concentration: banks, insurers, and pension funds are exposed to physical climate risks, especially from floods.
- Flood risk types to consider in modeling and policy deliberation:
  - inundation outside diked areas (”Type A”);
  - breach of primary flood defenses, in particular along the shore or major rivers (“Type B”);
  - breach of non-primary flood defenses, along smaller rivers (“Type C”);
  - inundation of regional water systems (“Type D”).
- Transition risks:
  - “Nitrogen crisis”—nitrogen depositions currently exceed critical values and need to be reduced drastically by 2030.
  - Measures would target agriculture, transport, and construction, with implications for banking and insurance sectors.
  - Policy direction is highly uncertain given ongoing government coalition talks and measures have been vocally opposed by farmers.
- Litigation risk is growing with financial and reputational implications; courts have ordered corporate emission reductions and legal actions targeting financial institutions are a concern.

### Banks
- Banking sector’s physical risk exposure is mostly through flood events; local nature of floods has so far limited overall impact on banks.
- Current flood maps may not hold for future floods; flood scenarios could reveal larger financial losses.
- Government reinforcement plan (strengthening dikes and enhancing flood warning systems) could mitigate anticipated losses.
- Estimated banking sector exposure to high nitrogen-emitting sectors:
  - 34 billion euros in domestic loans.
  - This constitutes 6.5 percent of total loans and 1.5 percent of total assets.
- Nitrogen emission intensity metric measures nitrogen emission per unit of value-added and is weighted by bank exposure; recent decline in this metric is primarily attributable to policy interventions and efforts by economic agents rather than portfolio shifts by banks.
- Transition risk via credit channel: loans to financially vulnerable firms in high nitrogen-emitting sectors could face losses due to higher leverage and financial constraints; clarity on policy path to reduce nitrogen deposition is essential for banks’ decision-making. Interim measure: banks can incorporate environmental disclosure into credit risk assessments.

### Insurance
- Insurance sector exposure is concentrated in non-life underwriting.
- Most important domestic natural perils: windstorms, hail, and floods.
- Expected climate impacts:
  - Hailstorms expected to occur more often and are difficult to model due to local nature.
  - More precipitation and a rise in sea levels increase flood risk.
- Scientific evidence on future frequency or severity of European windstorms is not clear-cut.

_Italic: Source: 1nldea2024008 - 8.      Dutch financial institutions are exposed to physical climate risks from floods, due to_

### 25.      Not all flood risks can be insured in the private market. While primary flood defenses

### 25. Not all flood risks can be insured in the private market. While primary flood defenses (“Type B”) are not insured by private insurers,

### Flood risk types and insurer exposure
- Flood types defined:
  - Type A: inundation outside diked areas.
  - Type B: breakthrough of primary flood defenses (not insured by private insurers; compensation provided by the government).
  - Type C: breakthrough of non-primary flood defenses (form the largest exposure of the property & casualty insurers, particularly along rivers).
  - Type D: inundation of regional water systems.
- Expected loss distributions differ by flood type, with particularly fat tails for Type C.
- For Type A, Type C, and Type D (the three flood types covered by insurers), Dutch primary insurers retain very limited exposure to events with lower occurrence probabilities and transfer most of that exposure to reinsurance.
- Dutch insurers underwrite hardly any risks outside the Netherlands in lines of business vulnerable to flood risks; however, foreign entities within Dutch insurance groups could have local exposures.

### Historic insured losses from natural disasters (2007-2022)
- By far the most severe flood event over the last decades occurred in the province of Limburg in July 2021; insured losses in the Netherlands of this event amounted to around EUR 250m.
- Table of insured losses (Date — Type — Insured Loss (EURm)):
  - 06/23/2016 — Hail — 667
  - 02/18/2022 — Storm — 611
  - 01/18/2018 — Storm — 538
  - 01/18/2007 — Storm — 332
  - 10/28/2013 — Storm — 211
  - 08/30/2015 — Hail — 121
  - 06/22/2008 — Hail — 118
  - 07/15/2021 — Flood — 115
  - 07/14/2021 — Flood — 109
  - 05/26/2009 — Hail — 106
  - 02/09/2020 — Storm — 104
  - 08/31/2015 — Hail — 84
  - 02/19/2022 — Storm — 83
  - 07/28/2014 — Rain — 81
  - 06/18/2021 — Storm — 80
  - 01/03/2018 — Storm — 78
  - 06/28/2011 — Hail — 75
  - 03/31/2015 — Storm — 73
  - 05/10/2019 — Storm — 68
  - 05/29/2018 — Rain — 67
- Source for the table: Dutch Insurance Association, Klimaatschademonitor.

### Scenario analysis and insurer solvency impact
- Scenario: Repetition of the 2021 Limburg flood, based on today’s exposures and assuming a 25 percent increase in maximum precipitation during the event:
  - Would result in net claims of EUR 180m for the sample of five large property & casualty insurers (text).
  - Figure caption indicates a similar estimate: a repetition with 25 percent higher maximum precipitation would cause net claims of around EUR 190m for insurers in the sample (figure annotations show Gross and Net Claims and SCR effects).
  - The SCR ratio for the median insurer would drop by less than 5 percentage points to 153 percent (text).
- Modeling approaches used by insurers vary markedly, including on the likelihood of such a hypothetical event.
- Figure findings (descriptive):
  - Non-primary flood coverage (Type C) would cause the highest losses, which increase substantially for lower occurrence probabilities.
  - Use of reinsurance limits the net claims for the Dutch primary insurers significantly.
  - The ‘scaled-up’ events in analyses refer to the Limburg flood of July 2021 and the cloudburst of July 28, 2014, each assuming maximum precipitation 25 percent higher than historically observed.
- Notes: Expected Gross Claims and Expected Net Claims are presented for event return periods: Expected 2023, 1-in-100y AEP, 1-in-200y AEP, 1-in-500y AEP, 1-in-1,000y AEP. SCR Coverage Ratios (in percent) and Gross and Net Claims (in EUR millions) are shown for scenarios including Limburg, Limburg scaled-up, Cloudburst, Cloudburst scaled-up.

### Regulatory and supervisory responses (key measures and findings)
- Banking and insurance climate-risk supervision builds on EU primary frameworks, notably CRD/CRR, supplemented by EBA implementing measures and guidelines, and for significant institutions (SIs) the ECB Guide on Climate-related and Environmental Risks.
- Solvency II Commission Delegated Regulation (S II CDR) amendment in 2021 requires insurers to consider sustainability risks in underwriting and reserving, and to identify, assess and manage sustainability risks relating to the investment portfolio (Article 260 S II CDR).
  - Responsibilities for functions spelled out: risk management (Art. 269) and actuarial function (Art. 272).
  - Remuneration policy must include information on how it takes into account the integration of sustainability risks in the risk management system (Art. 275).
- Domestically, DNB published the “Guide to managing climate and environmental risks” in March 2023 addressing insurers, pension funds, investment firms and institutions, and electronic money and payment institutions.
- Supervisory practice:
  - DNB conducts annual thematic reviews based on institutions’ self-assessments; reviews for LSIs began in 2019 and are benchmarked against the ECB Guide since 2021; insurance reviews started in 2023.
  - Findings are summarized in sector-level press releases and individualized management letters followed by bilateral meetings; institutions submit action plans and DNB follows up.
  - For 2024, another round of the self-assessment is planned with all insurance undertakings included.
- DNB governance and capacity:
  - DNB anchors climate risk supervision on existing powers (Financial Supervision Act Wft Sections 1:24, 3:17, 1:28) and focuses on material climate-related risks.
  - Sustainable Finance Office (SFO) ensures strategic steering; SFO coordinates a knowledge hub and facilitates the Sustainable Finance Strategy (SFS) and Strategic Sustainable Finance Program (SSFP).
  - DNB’s internal sustainability network and expert sessions support capacity building; a structured training program for insurance supervision with a kick-off scheduled for 2024 is being developed.
- Resource challenges:
  - Growing demands to supervise complex approaches require a gradual increase in human resources; LSI and insurance supervisors are increasingly expected to dedicate capacity to climate risk supervision while overall resources remain unchanged.

### Key recommendations (as stated)
- Recommendation 2: Further elaborate DNB’s Sustainable Finance Strategy in individual departments’ medium-term plans and strengthen systematic and coordinated development of sectoral agendas.
- Recommendation 3: Align resources allocated to direct climate risk supervision with the ambitious strategy, and periodically reflect on further growing capacity demands.
- Recommendation 4: Develop a mandatory program that would systematically enhance and regularly update the expertise of supervisors in climate-related risks area.
- Sequencing suggested for integrating climate risks into supervision (listed in text):
  - (i) elaborate the annual review to other areas to verify compliance with the ECB Guide and the DNB Guide for non-banks;
  - (ii) sequentially incorporate the climate perspective into regular supervisory analyses;
  - (iii) develop quantitative dashboards, and expand those already used in insurance supervision;
  - (iv) enhance the onsite examination program by the climate–related risk dimension;
  - (v) reflect supervisory findings in individual risk assessments and incorporate these assessments into the Supervisory Review Process;
  - (vi) integrate climate risk supervision across the entire supervisory process.

*Source: IMF staff analysis in the chapter excerpt provided.*

### 44.       Recommendation 5: Establish a medium-term plan to develop LSI/insurance climate risk

### Recommendation 5: Establish a medium-term plan to develop LSI/insurance climate risk supervision which would include specific milestones and outline resource demands with the aim to incorporate climate-related risk perspective across activities of the supervisory process.

### Supervisory plan, dashboards, and data
- DNB has started measuring the ESG risk level of insurers’ investments and presenting them in a dashboard.
- Data sources and methodology:
  - Uses data from supervisory reporting in combination with ESG data provided by external providers, like MSCI and ISS ESG.
  - Current risk-level indicators: weighted average carbon intensity (WACI), exposure to transition sensitive sectors, exposure to companies with ‘fossil activities’.
  - DNB has limited look-through information on investment funds, which account for a significant share of investments of many insurers.
- DNB is preparing a dashboard to support LSI supervision:
  - Relevant data sources, including publicly available data, have been identified.
  - Additional data could be collected with the expansion of DNB’s powers and amendments to the EU reporting framework.
  - DNB has formulated supervisory indicators, which are being tested.
  - Pre-defined indicators could be complemented by ad hoc quantitative analyses.

### Emerging practices and internal cooperation
- Scenario analysis and stress-testing collaboration:
  - Emerging practices in scenario analysis could support supervision if collaboration is strengthened through the process of developing and applying stress testing tools.
  - Supervision could expand quantitative insights by deepening cooperation on scenario analysis and similar exercises currently performed by financial stability experts.
  - Closer cooperation among supervision and financial stability within DNB could result in formulating specific projects that benefit both functions while not duplicating ongoing initiatives.

### Recommendation 6: Explore opportunities for joint projects involving both supervisors and stress testers.
- Rationale and context:
  - DNB is establishing a stress testing capacity with the potential to explore new frontiers of emerging risks.
  - DNB was the first major central bank to conduct a comprehensive transition risk stress test for banks, insurers and pension funds in 2018.
  - DNB also performed a PACTA analysis on banks’ loan portfolios (including a selection of LSIs) to analyze the extent of transition risks.
  - DNB did not perform a comprehensive supervisory climate risk stress test for banks yet, as it decided to first learn from the experience collected in the ECB exercise.
- Benefits of integrating stress testing into supervision:
  - Supervisors and other users largely benefit from outcomes of stress testing exercises.
  - If the design of individual stress testing exercises is sufficiently internalized by supervision, outcomes can be smoothly incorporated in supervisory practice.
  - With the expansion of modelling capabilities of financial institutions, supervisors will need to extend their expertise.
  - Supervisors could benefit from internal knowledge transfers, for instance, including in the Supervisory Review and Evaluation Program (SREP) for LSIs.
  - Stress testers could benefit from collaboration with supervision (e.g., insurance supervision gathering information from scenario analyses used by insurers in their Own Risk and Solvency Assessment (ORSA)).
  - Financial institutions will benefit from high-quality feedback from DNB.

### Recommendation 7: Deepen collaboration among DNB supervisors and DNB stress testers on climate risk supervision to (i) extend quantitative supervisory analyses, (ii) develop supervisory capacity to evaluate modelling approaches used by financial institutions, (iii) inform DNB’s stress testing programs with insights of supervisors.

### Regulatory context and supervisory expectations
- EU/SSM framework:
  - Insurance and LSI supervision are framed by EU/SSM regulations, leaving limited space for national approaches.
  - Regulatory requirements for LSIs are primarily formulated in CRD/CRR, including related technical standards and guidelines.
  - Climate-related risk references across the Pillars:
    - (i) climate risk disclosures (Pillar 3) — see Article 449a CRR, disclosure of environmental, social and governance risks (ESG) risks.
    - (ii) the role of climate related risks in the Pillar 1 framework, and beyond — see Article 501c CRR, prudential treatment of exposures related to environmental and/or social objectives.
    - (iii) climate risk considerations for Pillar 2 — see Section III CRD, Supervisory Review and Evaluation Process (the latest version CRD V).
  - The EU already established the Pillar 3 requirements; these requirements are effective and first disclosures have been already published.
  - EBA outputs:
    - EBA published a report analyzing ‘the role of environmental and social risks in the prudential framework’ and recommended risk-based enhancements to the risk categories of the Pillar 1 framework, while not supporting a green supporting factor or a brown penalizing factor at this stage.
- ECB and DNB Guides:
  - The ECB’s ‘Guide on Climate-related and Environmental Risks’ and DNB's Guide for non-banks are central regulatory tools for LSI and insurance climate risk supervision in the Netherlands.
  - The ECB Guide was developed in parallel with EBA guidelines and prior to the BCBS Principles on Supervision and Management of Climate-related Financial Risks; content largely overlaps, with the ECB Guide providing greater detail.
  - The SSM performed a self-assessment of the Guide against the BCBS Principles and found it fully compliant.
- Proportional application:
  - The ECB Guide and the DNB Guide are applied proportionately and flexibly by DNB.
  - DNB applies broad supervisory judgement and communicates outcomes individually to financial institutions.
  - Further guidance on the proportionality principle is warranted to achieve consistent application and increase transparency.
  - The boundaries of proportionality can be defined in absolute terms or aligned with circumstances; main criteria should be clearly set and communicated externally.
  - For the application of the ECB Guide, DNB might consider coordinating its approach with partners in the SSM.

### Recommendation 8: Explain the application of the proportionality principle for individual sections of the ECB Guide and the DNB Guide, for both internal and external users.

### Supervision practices: fit-and-proper and conduct supervision
- Fit-and-proper interviews:
  - Climate-related and environmental risks are explicitly addressed in fit-and-proper interviews.
  - Assessment files prepared by banks or insurers and submitted to DNB must include information on the candidate's knowledge and experience with regard to such risks.
  - DNB may ask candidates in subsequent interviews about their knowledge, relevant legislation, and their impact on the institution.
- Protection gaps, insurability, and affordability:
  - The insurance sector has developed proposals for improving the insurability of flood risks.
  - The government is reviewing the regulatory framework for damage compensation.
  - It is not advisable to simply copy regimes from other countries; a potential public-private partnership should follow ECB and EIOPA principles:
    - Provide prompt payouts of claims to policyholders.
    - Incentivize risk mitigation and adaptation measures.
    - Reduce moral hazard.
    - Lower the share of economic losses borne by the public sector over the long term.
  - Improve transparency on available insurance solutions:
    - Information on availability and terms of disaster coverage through private insurance should be actively communicated to (prospective) policyholders.
    - Public authorities might have a role in ensuring relevant information reaches households that are financially vulnerable and/or financially less literate.
    - Authorities could include more systematic monitoring of pricing trends for flood coverage.

### Practice by financial institutions: LSIs, insurers, and pension funds
- Management of Climate-Related Risk by LSIs:
  - Reviews of self-assessments indicate a growing capacity of LSIs to assess materiality of climate-related risk; annual horizontal reviews by DNB indicate improvements, particularly in materiality assessments.
  - The mission had limited opportunity to verify progress due to lack of access to supervisory files.
  - LSIs pay enormous attention to climate-related and environmental risks, adjusting business models and products, disclosing policies and relevant data following international disclosure frameworks.
- Management of Climate-Related Risk in Insurance:
  - Large insurers are front runners in implementing ESG policies:
    - Some have published climate plans for several years and joined alliances like the Net Zero Insurance Alliance and the Net Zero Investment Alliance.
    - Large insurers have dedicated staff specialized on ESG and climate topics and engage with the Dutch Insurance Association.
  - ORSA and scenario use:
    - Most insurers have incorporated an assessment of climate risk in their ORSA and use various scenarios to identify material risks.
    - At the end of 2019, DNB published a Q&A on how to include climate risks in the ORSA and started assessing insurers’ ORSAs in 2020/21.
    - DNB identified room for improvement and communicated results individually and to the sector.
- Pension funds (Box 4 highlights):
  - For the large Dutch pension fund sector, DNB applies a supervisory framework similar to the insurance sector.
  - Initiatives and results:
    - Self-assessment piloted in 2023 for a sample of the 39 pension funds covering strategy and business model, governance, risk management, information and disclosure, and investments.
    - Dedicated on-site inspections: Over the past two years, DNB conducted six on-site assessments with some of the larger pension funds and eleven light reviews to assess practices and gather best-practice insights.
    - Dashboard for transition risk uses WACI, exposure to transition-sensitive sectors, and exposure to companies with fossil activities.
    - Further work planned for 2024: consider formally including ESG-related risks in the supervisory assessment framework, increase knowledge of supervisors, and explore data availability to improve measurement of sustainability risks.
    - Challenges: absence of standardized benchmarks to comprehensively evaluate pension funds’ risk management; indicators lacking on physical risks or biodiversity loss due to insufficient and unreliable data.
- Internal controls and implementation gaps in insurers:
  - DNB concluded that almost 80 percent of insurers’ key function holders have a dedicated responsibility on ‘climate risk’.
  - DNB has not yet assessed specific ‘charters’ of key function holders but plans to perform at least two on-site investigations in 2024 where this will be a focal point.
  - Assigning climate-related responsibilities and reporting lines across the three lines of defense appears not to be implemented at large scale among insurers.
  - Embedding management of material climate-related financial risks in policies, processes and controls across all relevant functions and business units is at an early stage; DNB has very limited evidence on how this works in practice and few implementation steps have been taken at larger scale.

*Source: 1nldea2024008 - Recommendation 5: Establish a medium-term plan to develop LSI/insurance climate risk supervision (excerpts).*

### 64.      Disclosure and data are key to improve management of climate-related risks, while

### Disclosure and data are key to improve management of climate-related risks, while

### Disclosure: current practices and developments
- Dutch financial institutions have been frontrunners in applying various disclosure frameworks, including early adoption of the Task Force on Climate-Related Financial Disclosures (TCFD) framework and complementary frameworks such as Partnership for Carbon Accounting Financials (PCAF) standards.
- EU legal footing for climate disclosures:
  - Non-Financial Reporting Directive (NFRD) introduced non-financial reporting requirements for companies and financial institutions; NFRD will be replaced by the Corporate Sustainability Reporting Directive (CSRD) and the underlying European Sustainability Reporting Standards (ESRS).
  - Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to provide transparency on sustainability characteristics and objectives of their financial products in pre-contractual disclosures, on websites, and on a periodic basis.
- Banking supervision and Pillar 3 ESG disclosures:
  - The EBA's ESG Pillar 3 disclosures rules came into force for large financial institutions at the end of 2022.
  - By 2025, with the introduction of CRR3, the EBA Pillar 3 disclosures on ESG risks will apply to all banks in the EU; the EBA introduced proportionality measures with a sequential implementation period from 2023 to 2025.
  - Disclosures are required to cover:
    - Climate-change related transition and physical risks;
    - Institutions’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy and in the adaptation to climate change;
    - Key Performance Indicators on institutions’ asset-financing activities that are environmentally sustainable according to the EU green taxonomy (Green Asset Ratio and Banking Book Taxonomy Alignment Ratio);
    - Qualitative information on how ESG considerations are being incorporated into governance, strategy, business model, and risk management frameworks.
  - Banking supervision is currently analyzing the first Pillar 3 disclosures.
- AFM plans to review the first CSRD mandatory corporate climate disclosures; AFM and DNB could jointly evaluate initial lessons learned (e.g., via a joint working group) and communicate key messages to stakeholders. A multilateral format for exchange with major counterparts is suggested in addition to bilateral meetings.

### Disclosure: recommendation
- Recommendation 9:
  - Summarize and communicate initial lessons learned from first mandatory climate-related disclosures;
  - Continue a regular exchange of experience on climate-related disclosures among authorities and include major counterparts.

### Data: EU and Dutch initiatives, gaps, and challenges
- Pan-EU and international initiatives:
  - European Centralized Infrastructure of Data (EUCLID) could centralize disclosure data.
  - ECB has published the first submission of Pillar 3 disclosures.
  - EBA's Pillar 3 hub project should contribute to the European Single Access Point (ESAP) and accelerate Climate Information Architecture development at the EU level.
  - ESAP aims to offer free access to financial and sustainability-related information disclosed by selected EU corporates and related to a defined group of investment products.
  - In 2023, the ECB started publishing a set of climate-related statistical indicators, including indicators on sustainable finance, on carbon emissions financed by financial institutions, and on climate-related physical risks.
  - EIOPA introduced a dashboard on the insurance protection gap for natural catastrophes and provides an open-source application (CLIMADA-App) to estimate economic damage of extreme-weather hazards and potential increases due to climate change.
  - A number of private vendors offer data covering the EU jurisdiction.
- Dutch initiatives to improve primary data:
  - Dutch banking association preparing a set of schemes supporting the collection of data for different types of products and asset classes.
  - Association of Insurers outlined projects on improving data and sharing know-how on modelling approaches.
  - Projects supporting sustainability topics are outlined, including in the Sustainable Finance Platform.
- Layers of the data issue:
  - Apparent data gaps exist, but other problems include formats or granularities that do not match financial institutions’ needs, and data availability limited to some institutions (possibly due to market position).
  - Publicly available climate data may be outdated or lack accuracy.
  - The data issue requires a comprehensive, rigorous and independent review to identify how and where relevant data can be sourced.
  - There should be consensus on a set of data that does not constitute a competitive edge for a particular institution but should be broadly (and potentially freely) available to all institutions, taking into account limitations under the General Data Protection Regulation.
- Stakeholder views and practical problems:
  - For physical risks, public authorities collect and publish numerous data, but formats are not always convenient for direct use in risk management, calling for more standardization.
  - The idea of creating a single access point summarizing climate risk data from different sources resonated across meetings.
  - Exposures of small and medium-sized enterprises to physical and transition risks were repeatedly raised; joint efforts by research institutions, government agencies and financial institutions were seen as a way forward.
  - Mission team experienced model divergence: flood risk models used by property & casualty insurers can produce very different outputs, complicating comparisons and aggregation.

### Examples of available Dutch data sources (Box 5)
- Rijksdienst voor Ondernemend Nederland (RVO):
  - Warmteatlas.nl; e.g. a dataset that shows the average gas supply per individual property in a postal code area – allowing for a cross analysis against a bank’s mortgage loan book to derive a first and simple view on transition risk exposure;
  - Open data Dutch government; e.g. datasets on Natura 2000 areas and areas exposed to increased subsidence;
  - EP-online: database that holds all issued energy labels;
- Nationaal Georegister: e.g. datasets on water quality – next major theme in the Netherlands after climate and nitrogen that has the potential to cause substantial economic impact;
- Klimaateffectatlas: data maps on flooding, waterlogging, drought and heat; an initiative by the public sector, private institutions and academia, managed by the Climate Adaptation Services Foundation;
- Regionale klimaatmonitor: core dataset that combines data from various public authorities such as Statistics Netherlands (CBS) and RVO in a single dataset that covers a number of indicators to monitor emissions and energy use;
- Klimaatschademonitor: information on historic insured losses from weather-related natural disasters, provided by the Dutch Insurance Association.

### Data: coordination and recommendations
- The discussion on data gaps needs to be well structured and coordinated; opening a discussion with existing collaborative platforms or initiatives could be a useful first step.
- Creating a working group to review data needs and data sources is proposed; this requires cooperation of public authorities involved in data collection.
- The discussion can conclude in an initiative led by an inter-agency body, similar to the one proposed in Recommendation #1.
- Recommendation 10:
  - (a) Continue mapping systemic gaps in available climate data sets and explore possibilities to support initiatives focused on strengthening climate-related data sets used by financial institutions for risk management and disclosure.
  - (b) Further strengthen the engagement with financial institutions on the necessity to support their risk management by collecting consistent and granular data and disclosure which is available from their clients.

### DNB Sustainable Finance Objectives 2025 (selected targets)
- Integrate sustainability into all elements of DNB's core tasks by 2025.
- Supervision, financial stability and resolution:
  - Embed sustainability in supervisory methodology and digital supervisory processes; take appropriate measures if management of material ESG risks is insufficient; monitor progress on voluntary sustainability commitments.
  - Apply a forward-looking toolkit in monitoring financial stability, including through the Financial Stability Report and climate stress tests; explore as a pilot how to factor nature-related risks into macro analyses.
  - Further develop legal and regulatory framework, standards and supervisory toolkit; use influence in BCBS, EBA, EIOPA, FSB, NGFS and ISSB.
- Monetary tasks and payments:
  - Take climate-related risks into account wherever possible in the performance of monetary tasks; contribute to the ECB’s action plan to incorporate climate considerations into monetary policy and operations.
  - Reduce the environmental impact of payment systems where within DNB's control.
  - Monitor and promote universal access to financial products and services.
- Economic research and advice:
  - Put sustainability themes on the agenda with research and advice on climate change, the energy transition, sources of prosperity and inclusive policies, with attention to vulnerable groups.
  - Include environmental impact in main economic models and metrics.
- Statistics:
  - Use appropriate methodology; have reliable sources and methods for producing and using sustainability statistics; advance national and international data, statistics and standards.
  - Ensure data allows tracking current and estimated CO2 emissions of the Dutch financial sector and monetary system, including through adequate reporting from financial institutions.
- Reserve management and internal operations:
  - Design reserve management in a responsible, sustainable manner aligned with internationally leading ESG standards and international climate targets (“Own investments ‘Paris-aligned’”).
  - Be climate-neutral and as circular as possible in internal operations; aim to obtain the BREEAM Outstanding and DNBLL Platinum labels for (renovated) headquarters.
  - Prepare a transition plan detailing objectives such as carbon emission reductions and report transparently on sustainability risks inherent in DNB's work.
  - Ensure a diverse, safe, inclusive work environment.

*Source: Chapter text from the IMF staff report content unit 1nldea2024008.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nldea2024008.pdf_