PRA outlined its response to the industry feedback received on the framework for assessing the financial impact of physical climate change; the framework was published in May 2019 as a practitioner’s aide for the general insurance sector and was written by a cross-industry working group. The response, which is intended for the general insurance industry, summarizes the feedback received and the areas where further development is recommended. The feedback identified the a need for guidance to help assess the current model calibrations and whether these accurately represent climate change to date. In addition, the feedback highlighted the value in having a more streamlined expert judgment method for use when assessing impact from physical climate change and recognized that the impact from physical climate change includes opportunities as well as risks.
PRA considered the feedback and reflected on how to address it within the context of the current and future climate workstreams. As a result of this feedback, the following areas have been recognized as deserving prioritization for further development:
- Assessing each hydro-meteorological region-peril in detail and commenting on their future climate projection characteristics, while acknowledging that it may not be possible to always find an academic consensus for such projection characteristics. To this end, BoE is actively working to promote the latest scientific developments in a format that can be more easily consumed by central banks, supervisors, and the broader financial sector as part of its involvement in the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
- Assessing how current catastrophe model calibrations allow for climate change that has crystallized to date. To this end, PRA will explore that aspect further within the definition of the physical climate variables issued as part of the 2021 Climate Biennial Exploratory Scenario that published in December 2019.
- Assessing how the insurance industry’s experience on quantifying physical climate change risk on the liability side of the balance sheet could be used to develop a similar framework for assessing the risk on the asset and investment side of the balance sheet. To this end, the Climate Financial Risk Forum (CFRF) guide (published in June 2020) includes sections that discuss how the data, tools, and processes used by general insurers can assist other aspects of financial institutions’ climate risk management.
PRA will continue to engage with insurance firms on their progress with embedding the supervisory expectations as set out in the supervisory statement SS3/19 on enhancing bank and insurer approaches to managing the financial risks arising from climate change and the July 2020 letter of Sam Woods, which provided thematic feedback to all regulated firms on the PRA review of firms' SS3/19 plans and clarifications of expectations. In the future, PRA will also consider whether a follow-on report to "A framework for assessing financial impacts of physical climate change: A practitioner’s aide for the general insurance sector" is required to deepen, broaden, or updates its content. Decisions in this regard will be driven by observations of progress across industry (for example, through firms’ progress against SS3/19 expectations) and results from other climate exercises (for example, the 2021 Climate Biennial Exploratory Scenario).
Keywords: Europe, UK, Insurance, Climate Change Risk, ESG, CBES, CFRF Guide, Catastrophe Risk, SS3/19, PRA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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