On 22 May 2019, the Prudential Regulation Authority (PRA) published a report outlining a framework for practitioners to use to assess the financial impact to the liability side of the firm’s balance sheet caused by future climate change. The framework was developed by a cross-industry working group and is aimed at practitioners working with, or at, general insurance firms who are assessing the impact of climate change.
The framework is intended as a starting point for firms to assess the impacts in the context of their business decisions and disclosure requirements.
The framework has six stages. These are:
- Identify business decision(s): a physical climate change study would typically aim to inform a business decision or activity. This stage of the framework will decide the time horizon and metrics that need to be considered.
- Define materiality: this stage enables the firm to focus on the business areas where the physical risk from climate change could have a material impact on business decisions.
- Conduct background research: the firm will need to review existing scientific publications to understand better how climate change could influence the relevant areas identified. The likely outcome is a range of projected changes in frequencies or intensities of specific perils.
- Assess available tools: a decision will need to be made on which catastrophe tool(s) will provide the most suitable analysis.
- Calculate impact: this stage involves using the tools selected to assess the financial impact from the projected changes to the perils in question. Key considerations could include the appropriate communication of both the output and the uncertainty in the results.
- Reporting and action: output from the use of the framework needs to be communicated to decision makers in a manner that can inform the business decision(s) in question, highlighting the limitations and uncertainty related to the analysis.
This report also sets out recommendations for how the catastrophe analytics industry can contribute further, suggesting that is can play an important role in interpreting existing scientific studies and, combined with existing tools, assess the financial impacts from physical climate change while making recommendations for improving both future research and catastrophe tools development.
The working group is keen to get comments and views on the framework. Responses are requested by 22 November 2019.