David Gray

Understanding Own Risks Faced by Climate Change

Climate Change
PRA / Bank of England

18 June 2021

The Bank of England’s Climate Biennial Exploratory Scenario exercise (CBES) launched on 8 June. One of the key features of the exercise is consideration of three scenarios of early, late and no action built on a subset of the Network for Greening the Financial System (NGFS) scenarios. These scenarios explore transition and physical risks from climate change over a span of thirty years reflecting the longer-term nature of climate-related risks. 

Whilst the CBES exercise involves only the UK’s largest banks and insurers, the Governor of the Bank of England, Andrew Bailey, said "Firms should use the design of the CBES and the underlying NGFS scenarios to inform their own scenario analysis, build their understanding of the climate risks they face, and enhance their climate risk management capabilities." The hope is that the CBES will act as a catalyst, increasing firms’ knowledge of the risks they face, and incentivising them to take steps to address these risks. 

The PRA has previously covered supervisory expectations on insurers’ management of climate change risks in two publications - Supervisory Statement SS3/19 (April 2019) and further guidance in Sam Woods' letter (July 2020). 

David Gray commented: “I think it is particularly informative to look at the Bank of England's desired outcomes from the exercise.  Quite reasonably, the Bank’s aim is to understand industry and individual firm’s exposure to climate-related risks, understand the challenges to participants’ business models from these risks and assist management of these risks.  For insurers, the scenarios cover both assets and liabilities.  OAC will use these publications to enrich the qualitative and quantitative projections in Own Risk and Solvency Assessments (ORSAs) for OAC's insurance clients.” 

   

David Gray

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David Gray
Consultant Actuary

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