The Prudential Regulation Authority (PRA) became the first regulator in the world to publish their expectations for financial services firms relating to climate change, when it published a supervisory statement in April 2019 (SS3/19).
It is clear that regulatory and societal scrutiny is increasing regarding the impact that individual firms make on the planet, and how individual firms are affected. The large-scale Extinction Rebellion protests, which targeted financial services firms in the City of London attracting the attention of the global media, is testament to it.Insurers, as key economic actors can be affected by climate change in a number of ways. How insurers can show their Boards and regulators that they are proactively assessing, managing and reporting on the financial risks from climate change they are exposed to is paramount in meeting the regulatory expectations.
How are insurers affected by the risks from climate change?
Within SS3/19, the PRA identifies two primary channels through which insurers can be exposed to climate change risks:
- Physical risks – specific risk events (such as flood and hurricanes) or longer terms shifts in the climate (such as a rise in the average world temperature) occurring due to climate change.
- Transitional risks – risks that emerge during the process of adjustment to a low carbon economy that may become apparent in the form of emergence of disruptive technology, changes to policy, to peoples’ preferences and ensuing changes to business models.
Whilst these channels are somewhat theoretical in their nature, insurers can be affected by them in a number of ways. Examples where insurers may be affected:
The financial implications for insurers from climate change can appear across the risk spectrum, most notably liability-side risk, asset-side risk and non-financial risks:
These risks will affect both the asset and liability side of an insurer’s balance sheet, as well as the non-financial risks to which a firm is exposed to. It is far more all-encompassing than the financial risks resulting from climate change through their underwriting of specified risks.
SS3/19 makes it clear that the PRA expects all insurance firms to be considering and acting upon the financial risks from climate change.
What can insurers do about these risks?
Firms are expected to provide the PRA with the name of their Senior Manager responsible for Climate Change Risk by 15 October 2019. The PRA will be asking to see your plans for addressing how to meet these expectations. Are you going to be ready?
Firms that are “Quoted Companies” (as defined by the Companies Act 2006) are already subjected to mandatory disclosures to their investors and shareholders to explain the environmental matters (including the impact of the company’s business on the environment) and greenhouse gases emissions. As firms begin hedging investments in high carbon creators against carbon reducing assets, are you ready to accurately report this offset in your company’s annual report?
SS3/19 sets out the PRA’s expectations of firms in identifying, monitoring and managing these risks. We expect that the plans submitted by firms should cover the following six areas:
How Deloitte can help?
Deloitte can help you meet the PRA’s expectations relating to climate change.
In order to understand more about the financial risks from climate change faced by the wider UK economy, please review Deloitte’s recently launched website, which has been created in collaboration with the ICAEW.
For more detail on how insurers can be impacted by climate change risks, and what they should be doing about it, please feel free to register for our forthcoming webinar on the topic, details of which can be found https://event.on24.com/wcc/r/2045531/306A62DF8729C0817B0C79DBED50EC82