Climate change could hike capital increases for insurers
The FCA and Prudential Regulation Authority are creating a Climate Financial Risk Forum.
The move is in response to a new warning from the FCA that climate change threatens to drive escalating claims costs for insurers.
It has coordinated action with the Prudential Regulation Authority (PRA) by opening the discussion on climate change and green finance.
The forum will involve senior staff from the insurance industry, as well as technical experts. Membership is expected to be finalised by the end of November, with the first meeting in early 2019.
It comes after the PRA issued a consultation paper on 15 October entitled ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.’
It said: “If losses related to physical risk factors are insured they can directly affect insurance firms through higher claims.”
It is inviting feedback on its proposal which suggests how all financial firms could manage climate change risk.
FCA opens ‘green’ discussion
The FCA is also seeking input on four areas that it considers a greater regulatory focus is warranted:
- climate change and pensions – ensuring that those making investment decisions take account of risks including climate change
- enabling competition and market growth for green finance
- ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change
- the scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks
Andrew Bailey, chief executive at the FCA said: “Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.
“The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way which meets users’ needs.”
It said it “welcomes the PRA’s consultation”. Both regulatory bodies have been working closely together to develop a joined-up approach to enhance the resilience of the UK financial system to climate change.
The FCA is seeking feedback by 31 January 2019 on the questions set out in the discussion.
PRA consultation paper
The paper seeks views on a draft supervisory statement for insurers to manage financial risks in relation to climate change.
It warned: “If losses are uninsured the burden can fall on households and companies, impairing asset values, increasing credit risk for lenders and reducing the value of investments held by firms.”
It highlighted that global insured losses from natural disaster events in 2017 were the highest ever recorded.
Explaining that insurers have “existing requirements to disclose information on material risks” the PRA said that it expects to inform firms’ compliance but also consider whether they benefit from these initiatives and making use of these tools.
The PRA added: “Firms would benefit from greater disclosure in the wider economy, and they would be in a strong position to encourage it through their ownership of financial assets.”
The PRA’s consultation will close on Tuesday 15 January 2019.
It proposed that firms fully embed the consideration of the financial risks from climate change into their governance framework.
“No great surprise”-KPMG
Jon Holt, head of financial services at KMPG UK said that the PRA’s warning on climate change risks today comes as “no great surprise.”
He warned: “If insurers do not make sufficient progress in their governance and strategic thinking on climate change we can expect this to be reflected in higher capital requirements.”
He said: “The PRA has increasingly been putting pressure on banks and insurers to make individuals accountable for the work they do, and the risks they face. This can be seen clearly in the Senior Managers and Certification Regime, and also in the regulator’s approach to Operational Resilience and now climate change. Risk is no longer managed in the boiler room, but the board room.”
Insurers on the “frontline”
The ABI argued that insurers are often on the “front line” in relation to climate change.
Steven Findlay, head of prudential regulation at the ABI, said: “Insurers are often on the front-line dealing with the results of rising temperatures and extreme weather so have a real stake in addressing climate change and are well aware they have a role to play in this.
“As a result, the ABI and our members are already involved in several industry-led initiatives such as ClimateWise and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures.
”But there is still more that can be done. We’re keen to contribute to the PRA’s consultation on this topic, and to get involved in the new Climate Financial Risk Forum they have also announced today.”
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