On September 29, 2015, the Bank of England’s Prudential Regulation Authority (“PRA”) issued a report analyzing the impact of climate change on the UK’s insurance sector. The report was based on survey responses from thirty PRA regulated insurance companies, four roundtable discussions with representatives from the insurance industry and discussions with stakeholders knowledgeable about the insurance industry.
The report identifies three “risk factors” to the insurance industry that are increasing with climate change (i) physical risks, (ii) transition risks and (iii) liability risks. More specifically, the report notes a trend of increased physical losses in recent years and says that physical risks from climate change may challenge assumptions underlying the insurance business and lead to larger payouts by insurance companies. The PRA also cites transition risks as risks driven by global investments in a lower emission economy noting that public policy, regulation, technology, pricing and innovation are factors that can impact global transition and affect investment portfolios of insurance companies. Finally, liability risks from climate change are identified as an increase in third party claims that are driven by climate events and are unforeseen by insurers.
The PRA report concludes that, “there is potential for climate change to present a substantial challenge to the business model of insurers.” The PRA calls for international collaboration between insurers and regulators to better understand the risks identified and develop a societal response to climate change. Many UK insurance leaders responded to the PRA study by letter on September 30, 2015, acknowledging the climate change concerns raised in the report and welcoming the opportunity to collaborate and address such risks to the insurance industry.
A copy of the PRA report can be found here.