The impact of climate change on the UK insurance sector: A climate change adaptation report by the Prudential Regulation Authority
The report warns insurance companies to prepare for the physical, transition and liability risks related to climate change. It provides a comprehensive review of how to manage future implications from climate change on financial stability and insurance.
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OVERVIEW
Background
The first chapter places climate change in the context of public policy and the PRA’s regulatory responsibilities. The PRA accepted an invitation from the Department for Environment, Food & Rural Affairs to examine the impact of climate change on the PRA’s objectives.
Insurance industry and climate change
Chapter two summarises the main findings from a survey of 30 UK insurance firms conducted by the PRA in 2014, which aimed to gauge the industry’s understanding of climate change and its impact. Respondents noted increased frequency and severity of extreme weather events and higher losses associated with such events. Insurers also expressed doubts about the availability of data and the uncertainty surrounding the issue.
Physical risks
Chapter three analyses the physical risks associated with climate change over three time horizons (current, medium and long-term). The report found that many physical risks are currently being managed effectively by insurers. However, there is a need for the insurance industry to consider and address the effects of climate change for the medium and long-term risks. Extreme weather events such as floods, storms, and wildfires were identified as the main sources of physical risks posed by climate change. The report recommends that insurers should identify and disclose the regions or classes of assets with the biggest exposures to physical risks associated with climate change.
Transition risks
Chapter four examines the transition risks taking into account the transition to a lower carbon and hence lower polluting economy. The report found that transition risk is more difficult to assess and manage than physical risk due to the longer-term nature of the changes and the lack of a clear timeframe. The PRA recommends that insurers should consider the financial risk and impact of moving away from carbon-intensive assets in the medium and long-term.
Liability risks
Chapter five explores the legal risks for senior industry representatives that may stem from failing to assess and adapt to climate change risks. The report highlights the need for directors and officers to consider and manage the implications for investee companies arising from the physical, transition and liability risks associated with climate change. A lack of consideration or inadequate preparation for climate risk may expose directors and officers to regulatory and shareholder actions.
Conclusion
Chapter six concludes that the PRA encourages the insurance industry to continue to develop its understanding of the physical, transition and liability risk of climate change in the medium and long-term.
Appendices
Appendix A comprises the PRA Climate change adaptation survey and Appendix B identifies how Life Assurance companies are managing the risks and identifies implications for the industry in the future.
The report recommends that insurers plan for the potential impact of climate change over the medium- and long-term and disclose and manage their exposure to climate-related risks. The report serves as a definitive guide for creating a comprehensive approach to understanding climate-change-related risks in the UK insurance industry and provides insight into how other industries can also analyse and address such risks.
