As economic and insurance exposures in high-risk regions are likely to increase with climate change, impacting banks\u2019 and insurers\u2019 ability to support clients, the Bank of England has updated its supervisory expectations to help guide these firms in managing climate-related financial risks.<\/p>\n
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In recent years, the world has faced a number of natural disasters that have been exacerbated by climate change, such as the floods which struck Spain last October, the European heat wave in 2022, unprecedented flooding in Pakistan and the January wildfires in California.<\/p>\n
For financial institutions like banks and insurers, climate-related financial risks can affect their ability to assist their clients. This includes entities transitioning away from fossil fuels and those vulnerable to broader transition risks arising from shifts in government policy and consumer behaviour.<\/p>\n
Consequently, the commercial resilience of banks and insurers may be challenged as losses materialise, David Bailey, Executive Director for Authorisations, RegTech and International Supervision at the Bank of England, highlights.<\/p>\n
For regulators, like the Prudential Regulation Authority (PRA), climate change is a great concern both from a risk perspective and in terms of the financial sector\u2019s ability to support the wider economy, the executive explains.<\/p>\n
Noting that with effective risk management, firms will create a more efficient financial system that can withstand the increase in the frequency and severity of climate events, which is essential for supporting both the sustainable growth and the competitiveness of the UK economy over the medium to long term.<\/p>\n To help firms manage climate-related risks the Bank of England created their first supervisory expectations back in 2019. The Supervisory Statement 3\/19 was released to guide banks and insurers in their approach to managing the financial risks arising from climate change, as they were understood at the time.<\/p>\n Much has developed since then, and the Bank of England has opened the consultation window to update those expectations.<\/p>\n Bailey stated: \u201cThe first thing to clarify is that these are expectations, not rules. They are enhancements to our previous expectations set out in SS3\/19 and do not represent a change of direction in our approach to climate risk.<\/p>\n \u201cThe proposed expectations consolidate and clarify the feedback that the PRA has provided publicly on climate risk since SS3\/19 was published. They will align our approach with the relevant international standards for insurers and banks in a way which is consistent with the PRA\u2019s objectives. And they will bring our guidance up to date by adding detail to those areas where our understanding of best practice has matured.\u201d<\/p>\n The updated expectations place great emphasis on scenario analysis, an area that has developed significantly in the last few years.<\/p>\n Given that climate-related risk management cannot solely depend on historical data like traditional risk assessments, the predictability of climate change’s potential economic impact underscores the necessity of scenario analysis for all firms, Bailey explained.<\/p>\n Adding: \u201cFirms will be expected to show a strong understanding of how they will take the outputs from the scenarios they design and construct and use them to actively inform the business decisions they take.<\/p>\n \u201cDeveloping scenario analysis to actively inform decision making also requires firms to overlay their own judgement and risk appetite, as they know their own businesses the best. Therefore, we have stressed the need for further integration of climate risk into firms\u2019 governance frameworks.\u201d<\/p>\n Another area in which the Bank of England’s expectations have been developed is \u201cthe need for firms to have a clear statement of risk appetite that cascades down from the top of the firm to individual business lines.\u201d<\/p>\n This would imply that senior management will have to ensure they have appropriate analysis to allow them to understand the risks they are accepting before signing off their firm\u2019s climate risk appetite.<\/p>\n In line with this, robust risk management frameworks, based on transparent assumptions with appropriate senior management oversight, will allow firms to balance the risks they face when setting their business strategy.<\/p>\n Bailey noted that all of this will be dependable on the availability of high-quality disclosures. He stated: \u201cTo this end the PRA continues to be a strong supporter of the International Sustainability Standards Board (ISSB) and the development of a framework for UK Sustainability Reporting Standards (SRS).<\/p>\n \u201cComprehensive and consistent disclosures should support transparency and the efficient management of climate risk.\u201d<\/p>\n He continued: \u201cFrom a regulatory perspective, our approach has not changed. Our supervision is still forward looking, risk-based and proportionate. The expectations have been designed to reflect this.\u201d<\/p>\n While the updated expectations may cause firms some short-term costs – likely limited for those already aligned with developments -, it is anticipated that these will be outweighed by the medium- to long-term benefits of improved identification and management of an important class of emerging risk, Bailey highlighted.<\/p>\n The post BoE updated supervisory expectations to strengthen climate risk management for insurers<\/a> appeared first on ReinsuranceNe.ws<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" As economic and insurance exposures in high-risk regions are likely to increase with climate change, impacting banks\u2019 and insurers\u2019 ability to support clients, the Bank of England has updated its supervisory expectations to help guide these firms in managing climate-related financial risks. In recent years, the world has faced a number of natural disasters that […]<\/p>\n","protected":false},"author":1,"featured_media":3733,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[10],"tags":[],"_links":{"self":[{"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/posts\/3731"}],"collection":[{"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/comments?post=3731"}],"version-history":[{"count":3,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/posts\/3731\/revisions"}],"predecessor-version":[{"id":3735,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/posts\/3731\/revisions\/3735"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/media\/3733"}],"wp:attachment":[{"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/media?parent=3731"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/categories?post=3731"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/calebdewey.com\/index.php\/wp-json\/wp\/v2\/tags?post=3731"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"Download](\"http:\/\/calebdewey.com\/wp-content\/uploads\/2025\/04\/catastrophe-bond-ils-market-report-q1-2025-728x90-2.png\")
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