Climate Change Risk Assessment: A Framework for Insurers

It’s already clear that climate change will present real financial risks to insurers over the coming decades – but how should the sector respond? A cross industry working group set up by the UK’s PRA has published a framework for the general insurance sector to guide them through assessing the financial impacts of climate change.

The framework aims to be practical, drawing on tools insurers already use to model extreme weather risks and sets out a six-step framework for insurers to follow, centred around the question of how could the business processes be impacted given a range of possible climate outcomes? The report also uses a number of case studies to illustrate how the framework would work in practice.

Reporting, analysing and predicting the financial impacts of climate change is a complicated task, with a huge number of variables. The PRA highlights here how the catastrophe analytics industry could play a bigger role in analysing climate-related risk by combining existing tools that interpret scientific studies to assess the financial impact of climate change while also making recommendations for improving future research. With new data sources offering alternative forms of up-to-date data there is scope for new kinds of analysis to develop.

The hope is that practical, easy to follow guidance can take more insurers from awareness to action on climate-related risk. With widespread adoption of a coherent framework, consistent, comparable analysis could be achieved – offering more insight into the growing financial risks that physical climate change presents.