UK regulator the Prudential Regulation Authority (PRA) has set out its priorities for 2022, which include a renewed focus on the financial risks arising from climate change.
The PRA acknowledged that some insurers and reinsurers have made “good progress” in embedding supervisory expectations on climate risk.
However, it added that progress has “not been consistent across all firms,” with “further work” required by many to meet those expectations.
Notably, the Authority warned re/insurers against overly focusing on the business opportunities presented by climate change and reminded them that it also presents an increasing business risks that “is foreseeable and demands action now.”
Other priorities for the PRA this year include financial resilience, operational risk and resilience, regulatory change, third-party branches seeking authorisation in the UK, and diversity and inclusion.
Financial resilience remains particularly important in light of the COVID pandemic, analysts explained, with re/insurers encouraged to “assess and address the challenges of a changing economic and claims environment.”
It added that all firms will also need to closely monitor credit risk within their portfolios and the impact on provisioning, as well as the issues presented by higher levels of general economy inflation.
“Covid-19 has demonstrated the potential for systemic risks to result in losses across the insurance sector,” the PRA stated. “For general insurers, we have seen limited evidence to show insurers have properly considered their aggregate exposures, including from silent cyber risk. Firms may be continuing to place reliance on rarely tested policy exclusions which could be threatened in an extreme event.”
The PRA further took the opportunity to remind re/insurers of its work with the Government to review Solvency II, and the implications for insurance.
This year, the Authority also plans to incorporate supervision of the financial risks posed by climate change into our core supervisory approach, with the assessment of a firm’s management of climate-related financial risks to be included in all relevant elements of the supervisory cycle.
“Firms should take a forward-looking, strategic and ambitious approach in managing climate-related financial risks across their business, including in both underwriting and investment. This approach should be proportionate to the scale of the risks and the complexity of a firm’s operations,” the PRA stated.
“As our collective understanding of climate-related risks, data, tools and best practice evolves, we expect firms to refine and innovate to better integrate climate-related financial risk management across their organisation. We will keep a range of supervisory tools under review for use where we see insufficient progress by firms in effectively managing their climate-related financial risks.”
Additionally, the PRA noted that re/insurers could benefit from further research on emerging climate-related financial risks, such as the potential impact of litigation risk on balance sheets and the impact of physical risks on assets and liabilities.
