The Prudential Regulation Authority (PRA) has published a report considering the impact of climate change on the UK insurance sector. The PRA accepted an invitation from the UK Department for Environment, Food and Rural Affairs to examine the impact that climate change might have on financial stability and
appropriate protection of policyholders. The report has been written in order to take into account the impact that systemic environmental risks might have on both general and long-term business.
The report will inform the Bank’s future work on climate risks and is expected to contribute to wider dialogue on these issues. The PRA expects firms to consider the risks identified in the report and will carry out a thematic review on the extent to which exposure to climate risks are captured in the ORSA. The report explores possible responses to risks caused by climate change. The report focuses on three primary risk factors, namely:
- Physical risks – i.e. risks arising from weather related events such as floods and storms and damage caused by these events such as property damage or disruption of supply chains.
- Transition risks – i.e. risks that might arise from a transition to a low carbon economy, for example where carbon intensive assets are re-priced.
- Liability risks – i.e. risks arising from parties seeking to recover losses from insurers who are believed to have some liability for losses caused as a result of climate change.
The report considers that ‘there is potential for climate change to present a substantial challenge to the business model of insurers’. The PRA considers that although climate change may present some opportunity for new lines of business it is possible that appetite for insuring certain risks, customers or assets may be reduced.
The report states that although many risks identified do not appear likely to crystallise fully in the near term, increasing physical risks could present meaningful challenges to firms’ business models.