PRA Consults on Framework to Assess Financial Impact of Climate Change
PRA published a report that presents the six-stage framework for assessing the financial impact of physical climate change. This framework is intended for practitioners in the general insurance sector and has been written by a cross-industry working group. Insurers can follow the framework, using existing tools and associated metrics to better assess, manage, and report exposure to physical climate risks, including extreme weather events, which in turn will lead to action. The working group is requesting comments on the framework by November 22, 2019.
The report demonstrates how expert judgement, hazard maps, footprints, and catastrophe models can be tailored to address the needs of practitioners, depending on the data available, the business need in question, and the required output metrics. The report also contains several case studies that illustrate how different stages of the framework could be used. The six stages of the framework are as follows:
- 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 for 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.
The framework outlined in the report is intended as a possible starting point for firms to assess the impact in the context of their business decisions and disclosure requirements. Although the results from such an analysis will have inherent uncertainty, the insurance industry is uniquely placed to manage this due to its existing expertise in dealing with uncertainty when assessing climatic extremes. While this report acknowledges that tools assessing physical climate change risk are evolving rapidly, it puts emphasis on outlining the tools and methodologies that are available to the general insurance sector to assess the potential impact of climate change on their insurance liabilities. The report discusses the advantages and disadvantages of each tool. The report also sets out recommendations for how the catastrophe analytics industry can contribute further, suggesting that it can play an important role in interpreting existing scientific studies; combined with existing tools, it can assess the financial impact from physical climate change while making recommendations for improving both future research and catastrophe tools development.
Comment Due Date: November 22, 2019
Keywords: Europe, UK, Insurance, Physical Climate Change, Climate Change Risks, Climate-Related Disclosures, Assessment Framework, PRA
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