The Bank of England has written to “dozens” of insurance and reinsurance companies as it seeks to better understand the risk that climate change poses to their solvency and earnings, according to the FT.
The FT reports that it has seen a letter from the BoE which asks whether the 30 or so re/insurers quizzed have any idea when rising temperatures or more frequent weather extremes might begin to affect their earnings, solvency or even viability as a business. The letters also ask whether insurers have considered the impacts of climate change in their assets and investments.
Regulators also enquire as to what re/insurers think of “the role of regulation” in climate change, according to the FT, which is perhaps the first time any regulator has directly addressed the possibility of oversight for re/insurers regarding climate change.
The question of regulation for insurance and reinsurance over climate change is an interesting one. Re/insurers capital models are partly based on ability to respond to certain catastrophic events, if climate change had to be factored in that could increase the expected losses, potentially resulting in a need for additional capital.
The Bank of England is surveying these re/insurers, from the life and general insurance sectors, as a result of an invitation from the UK environment department which is undertaking a climate assessment.
It’s interesting to note a regulators interest in the climate question as it is such a clear issue for insurers and reinsurers, particularly those with property, catastrophe and weather underwriting exposures. Insurers and reinsurers are as well-prepared as any sector for a changing climate, with reinsurers often running their risk models for temperature increases to see how that affects expected losses on contracts. That said, there is a fear that insurance, reinsurance and ILS may underestimate some of their exposure to climate change risks and that more needs to be done to understand and manage these risks.
However insurers and reinsurers are exposed to the lack of action on climate risks from other industries, customers and governments, hence any regulatory approach to climate risks needs to be very broadly undertaken and include scrutiny of government policy and also the response of other industries.
Insurers, reinsurers and also the insurance-linked securities (ILS) market would in the main welcome more focus on climate change risks across broader swathes of the economy as they stand ready to provide risk transfer for the weather and natural catastrophe risks associated with climate, rising temperatures and rising sea levels.