Bank of England to include climate-related financial risk supervision
Over the last month, the Bank of England has released two documents relating to the Climate Biennial Exploratory Scenarios (CBES). Within these documents, the Bank of England highlights the benefits of insurers conducting further research on emerging climate-related financial risks and sets out next steps for insurers participating in the assessment.
In January, the Bank of England issued a “Dear CEO” letter, penned by Executive Directors Anna Sweeney and Charlotte Gerken, which outlines their priorities for insurance for 2022.
The letter discusses the Prudential Regulation Authority’s (PRA) key focus in ensuring that the UK insurance industry remains resilient against increasingly complex risk. The first two sections draw on plans to uphold financial and operational resilience for insurance firms.
In section three of the letter, the Bank of England considers financial risks arising from climate change and highlights that minimising the future risks from climate change requires action now and remains a key PRA priority. Stating that although some insurers have made good progress in embedding SS3/19, announced in April 2019, this progress has not been consistent across all firms and so further work will be required by many firms to meet the PRA’s expectations.
As a result, the Bank of England will include supervision of climate related financial risks within its core supervisory approach from 2022 onwards. This approach will be informed by the 2021 Climate Biennial Exploratory Scenario (CBES).
About the launch of the second CBES assessment
Yesterday, the Bank of England released a follow up statement announcing a second round of the exercise on financial-related climate risk. Participating insurers will need to submit responses to questions focusing on their strategic response to the three CBES scenarios and the associated implications for their business models.
Find out more here: Bank of England launches a second round of the Biennial Exploratory Scenario (BES) exercise on financial risks from climate change.
What next for CBES?
The Bank of England expects to share results from CBES submissions in May this year.
To assist with CBES, Fathom provided their high-resolution flood risk information for the UK to the Bank of England. This dataset was used by the Bank of England to assist their interpretation of CBES returns and so Fathom are well positioned to help insurers meet their regulatory requirements to better understand the impact of physical climate change risk.