Bank of England's Carney says prepare for climate change

Climate change has profound implications for the insurance industry, according to Bank of England governor Mark Carney.

“Our very world is changing,” Carney told a City Dinner at Lloyd’s last night.

“While others have been debating the theory, you have been dealing with the reality,” Carney said. “Since the 1980s the number of registered weather-related loss events has tripled; and inflation-adjusted insurance losses from these events have increased from an annual average of around $10bn in the 1980s to around $50bn over the past decade.”

And he warned there is likely worse to come.

“The challenges currently posed by climate change pale in significance compared with what might come,” he said.

Carney outlined the risks from climate change that will impact insurance.

He said there is the physical risk to assets from floods and storms that damage property or disrupt trade.

There are liability risks, where parties who suffer loss or damage from climate change seek compensation from those they hold responsible. Carney said these risks could hit carbon extractors and emitters and their insurers.

And there are transition risks associated with the cost of adjusting to a lower-carbon economy.

“The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability,” he said. “There have already been a few high profile examples of jump-to-distress pricing because of shifts in environmental policy or performance.”

Carney pointed to a review from the PRA about the impact of climate change on UK insurers.

“Longer term risks could have severe impacts on you and your policyholders,” he said.

“Insurers are therefore among those with the greatest incentives to understand and tackle climate change in the short term. Your motives are sharpened by commercial concern as capitalists and by moral considerations as global citizens. And your response is at the cutting edge of the understanding and management of risks arising from climate change.”