PRA publishes consultation on UK insurers' climate risk management

By Rebecca Delaney

April 30 - (The Insurer) - The UK’s Prudential Regulation Authority published a consultation paper on Wednesday on proposals to update its supervisory expectations around insurers’ approach to climate risk management.

Consultation paper CP10/25 seeks to enhance guidance issued through supervisory statement 3/19 six years ago, which guides the approach of insurers and banks in managing the financial risks arising from climate change.

Scenario analysis is one area where understanding has significantly developed since the original supervisory statement was issued.

“Climate-related risk management practices cannot rely on historic data in the same way as for traditional risks,” said David Bailey, the Bank of England's executive director for prudential policy, at the Climate Financial Risk Forum earlier this month.

“But there is still a degree of predictability about the potential economic impact of climate change. In our updated expectations, we therefore place greater emphasis on the rigorous use of scenario analysis.”

Insurers will be expected to show a “strong understanding” of how they will use the outputs from scenarios to actively inform business decisions.

This includes decisions around risk appetite, which was highlighted by the PRA as another area where expectations have developed since 2019. Insurers are now expected to have a top-down statement of risk appetite for individual business lines.

“In line with this, robust risk management frameworks, based on transparent assumptions with appropriate senior management oversight, will allow firms to balance the risks they face when setting their business strategy,” said Bailey.

The PRA's 2025 climate change adaptation report in January identified significant variance in the maturity of climate risk management frameworks among regulated insurers, with some still in the process of embedding climate-related risk within risk appetite statements.

The consultation proposes a clarification of the PRA’s expectations that risk management frameworks reflect climate-related risks to ensure that existing risk appetites do not underestimate the impact of climate change.

The financial watchdog also noted that insurers’ own risk and solvency assessments (ORSAs) do not always assess the potential impact of climate change with sufficient depth or granularity.

The proposals seek to clarify that ORSAs must include climate scenarios for material climate-related risks, with clarified expectations of the different time horizons of the risks to be captured in an insurer’s risk management framework and ORSA.

“The PRA proposes to clarify that it expects insurers to detail the investment and underwriting changes they would make in response to climate-related risks and what metrics and indicators they would monitor to inform those decisions and their timing,” said the PRA.

“Regarding underwriting, this proposal is particularly relevant for non-life insurers who can quickly reduce coverage or reprice given the annual nature of their policies.”

The PRA also proposed to clarify that solvency capital requirements should reflect the impact of climate-related risks on underwriting, reserving, market, credit and operational risks, where relevant.

“While the existing regulatory framework is already comprehensive enough to cover climate-related risks implicitly, this proposal seeks to clarify this expectation and reaffirm how climate should be considered through the relevant risk components,” it added.

No new additional capital requirements are being imposed on insurers from the proposed clarifications.