BoE publishes climate stress test findings – insurance industry responds


The Bank of England has released the findings of the 2021 Climate Biennial Exploratory Scenario (CBES), and the takeaway is clear – early, well-managed climate action will mean less of a hit on insurers’ profitability.

“The aggregate results show that, for life and general insurers, the NAA (no additional action) scenario would be likely to have a more significant impact than either of the transition scenarios, even within the 30-year window of the exercise,” stated the BoE, whose exercise also examined the early action and late action scenarios in terms of limiting global temperature rises.

The central bank noted: “For life insurers, this was because forward-looking asset price impacts are greatest at the end of that scenario, with an overall impact worth just over 15% of total market value. Such falls in asset prices would of course affect all holders of assets and participants in such markets.

“For general insurers, the key way that losses materialised was via a build-up in physical risks, which resulted in higher claims for perils such as flood and wind-related damage. UK and international general insurers, respectively, projected a rise in average annualised losses of around 50% and 70% by the end of the NAA scenario.”

Under the CBES, participating banks and insurers were asked to model risks at a granular level, with the goal of improving climate risk management. It was found that, in general, UK life and general insurers have made good progress in incorporating climate risk into their existing governance frameworks.

“The [BoE] is actively considering the use of capital requirements to address climate-related financial risk faced by insurers and banks,” commented Clyde & Co partner Nigel Brook after the results were published. “Particularly in light of the Bank’s feedback on the results of this first CBES, assessing climate risk is now a priority for UK insurers.”

It was highlighted by the BoE, however, that banks and insurers still need to “do much more” in understanding and managing their climate risks exposure.

“The CBES exercise has highlighted how important it is for insurers and banks to move in lockstep with their counterparties across the economy in transitioning to net zero,” said Clyde & Co legal director Wynne Lawrence, who also pointed out that the findings will help regulators to shape future financial regulation in the UK.

“That is going to require concerted and predictable policy action that is clearly communicated and disclosure of clear metrics and standards of green and climate-resilient products and investments.”

Allianz Holdings, meanwhile, expressed its support for the climate stress test on banks and insurers, which was aimed at delivering a more holistic view of the financial risks of climate change.

“At a global level,” declared John Berry, Allianz’s chief risk officer in the UK, “Allianz is committed to environmental goals as part of the Net-Zero Asset Owner Alliance and the Net-Zero Insurance Alliance. “Just last month, we accelerated our global climate strategy, and we will now target net-zero operations by 2030 instead of 2050.

“In the UK, we will intensify our ongoing efforts to make our operations and supply chain ever more eco-friendly, to enable the green transition and to support our customers in living and working more sustainably.”

Allianz was among the participants of the CBES. More on that here.

BoE’s deputy governor for prudential regulation and Prudential Regulation Authority chief executive Sam Woods had this to say: “[The] exercise explores how well [banks and insurers] are equipped to manage the longer-term challenges from climate change, in the context of our financial stability objective.

“We find that they are likely to be able to absorb the climate costs which fall on them without material risks to solvency, but will face significant headwinds and therefore need to continue to invest in their ability to support the economy’s transition to net zero.” 

For the Association of British Insurers (ABI), the results of the CBES underscore the need for all stakeholders to work together towards ensuring that credible, realistic, and governable transition plans are set out.

“These results demonstrate that failing to take action will be disastrous for the economy and ultimately consumers,” asserted ABI regulation director Charlotte Clark.

“Our members are committed to learning from the CBES results, and to building on the significant progress made in the past few years on their climate risk management capabilities and developing long-term transition plans.”

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