Climate risk stress test for UK insurance sector

It is the first time the bi-annual tests have been extended to explore climate change and applies to the largest life and general insurers

Festival Net Zero 2021

The Bank of England has published new guidance for the insurance industry to stress test for a range of climate change scenarios.

It is the first time the bi-annual tests have been extended to explore cybersecurity and climate change and applies to the largest life and general insurers.

They are required to consider the impact of three hypothetical greenhouse gas emissions scenarios on selected metrics of their business models and asset valuations and must provide both qualitative and quantitative information on any climate scenarios the firms may have already developed.

The first two scenarios assume the Paris Agreement targets are broadly achieved while in the third scenario, it is assumed the goals are not met, resulting in a significant impact on the global climate.

A statement from the Bank of England states: “The set of climate scenarios explores the impacts to both firms’ liabilities and investments stemming from physical and transition risks. The PRA [Prudential Regulation Authority] will publish a summary of the overall results but no individual firm results will be made public.

“Insurers that have not been asked to participate in the stress test may find the materials useful to inform their own stress testing exercises.”

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