Climate change issues 'high priority' for UK insurance regulator

Out-Law News | 18 Mar 2019 | 11:23 am | 3 min. read

Tackling the financial risk of climate change is set to be a high priority issue for UK insurers in the coming months as regulator the Prudential Regulation Authority (PRA) is expected to shortly produce a final supervisory statement and a climate change-related survey for insurers.

PRA director of insurance supervision, David Rule, set out the regulator's approach to climate change and signalled some forthcoming policy developments at an industry conference last week. His speech came on the same day as the PRA and Financial Conduct Authority (FCA) published details of the first meeting of the Climate Financial Risk Forum (CFRF), a joint industry-regulator initiative established to develop a financial sector response to climate change.

Speaking at last week's Sustainability Summit, Rule said that the PRA's role was not to tackle climate change itself but rather to address the risks it posed to the safety and soundness of the UK financial system. However, he said that it was clear that the insurance industry was "looking for leadership and does want positive change", particularly given the "overwhelming support" for last year's draft supervisory statement on how banks and insurance companies should manage the financial risks arising from climate change.

Insurance law expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law.com, who attended the conference, said that Rule's speech had been "well-received", following "a long day of interesting and illuminating presentation and discussion on the role of the finance sector in addressing the world's climate change issues".

"While Rule was careful to emphasise that it is not the PRA's role to tackle the issue of climate change itself - a point that was met with some resistance within the audience - its mandate to promote the safety and soundness of firms squarely brought the issue within its agenda," she said. "In the near term, it is clear that this is a high priority issue for the regulator."

"One of the interesting points made was a not-yet publicly announced survey planned for the UK insurance industry this year, which Rule framed positively as a structured framework for firms to think about these issues from a longer-term perspective. He emphasised that firms should not be concerned that this will be a form of stress-testing - it will not. Together with the PRA's finalised supervisory statement to be published shortly, and a new Climate Financial Risk Forum, the year ahead should bring further clarity to insurers in addressing the growing impact of climate change risk on their business," she said.

In his speech, Rule noted that general insurers tended to be taking the most action around climate change. This was despite them being less exposed than life insurers whose liabilities are more likely to be held over 10, 20 or 50 year horizons during which the long term effects of climate change are more likely to be felt.

Property is an area with some of the highest risks, according to Rule. These risks are both transitional, such as the risks arising from the shift to low-carbon technologies, and physical, such as the risks associated with extreme weather events. Flooding has been a particular issue in the UK insurance market over recent years, leading to the establishing of the government- and industry-backed Flood Re affordable flood insurance scheme in April 2016.

For regulators, the challenge is to balance the physical risks of climate change to firms with the transitional risk from additional regulation, Rule said. He said that the industry had been seeking "more granular detail" in response to high-level recommendations from the regulators. In Rule's view, there may come a time when stricter rules and mandatory disclosure will be required from all firms. However, the PRA is "not looking to fossilise" its rules too early, before more is known about climate change and its impacts.

The PRA is "not expecting many changes" when it publishes its final supervisory statement on its expectations of banks and insurance companies for the management of financial risks arising from climate change, Rule said. The draft statement, issued in October, set out the PRA's view on how firms should apply effective governance, risk management, scenario analysis and disclosures to manage the financial risks connected to climate change.

The first meeting of the CFRF, hosted jointly by the FCA and PRA, took place on 8 March 2019. The group is made up of senior representatives from banks, insurers and asset managers, as well as the Green Finance Institute and the London Stock Exchange Group, and chaired by Sarah Breeden of the PRA and Christopher Woolard of the FCA.

The CFRF will meet three times a year. It has announced that it will set up four working groups focused on risk management, scenario analysis, disclosure and innovation, which will be tasked with producing practical guidance on each of these focus areas to be shared more widely with the industry.