Climate change stress tests: the what, the when, and the how

Climate change has become a topic of increasing focus across the re/insurance and wider financial sectors in recent years. It’s widely expected that climate change will impact insurability of properties, long-term investment decisions, product development, the ability to meet sustainability goals and more, with many firms well on their way to assessing the impacts of climate change on their business.

This future risk focus is underlined by regulatory moves from the Bank of England and equivalent organisations around the world.

The UK Prudential Regulation Authority issued its detailed climate change requirements in June 2021 for the Climate Biennial Exploratory Scenario (CBES).

This required the largest UK life and non-life insurers, Lloyd’s syndicates, banks and building societies to assess the impacts of physical and transitional risk from climate change, with results submitted in September 2021.

The PRA then issued a second round of the CBES in February 2022, requiring further detail on submissions.

We’ve rounded up some of the top questions that JBA is often asked by clients around regulatory reporting in the UK.

What is the PRA?

The Bank of England (BoE) Prudential Regulation Authority (PRA) regulates and supervises financial services firms. Regulation requires financial firms to hold sufficient capital and have adequate risk controls in place, and the PRA is responsible for supervising and regulating this in the UK for around 1,500 banks, building societies, credit unions, insurers and major investment firms.

What does the Climate Biennial Exploratory Scenario (CBES) mean?

Every two years, the Bank of England issues a Biennial Exploratory Scenario (BES), designed to test the resilience of firms to a range of less understood risks that are not neatly linked to the financial cycle. In 2021, the BES was used to explore the financial risks posed by climate change, becoming the Climate Biennial Exploratory Scenario (CBES).

Who had to respond to the CBES?

The CBES tested the largest UK insurers as well as the largest banks and building societies. Smaller firms were not required to complete the CBES. However, all firms were encouraged to begin assessing the risk regardless of CBES participation in line with a 2020 Dear CEO letter from the PRA, and moves from the Task Force on Climate-related Financial Disclosures (TCFD).

What was involved in the CBES?

Firms were required to assess the risk of climate change to their business in a number of ways:

1. Three different climate scenarios, largely corresponding to a best case, worst case, and average scenario in terms of transition period and societal actions taken to combat climate change.
2. A 30-year modelling horizon compared to the usual short-term horizons of re/insurance.
3. Both physical risk, i.e. impacts of changes in physical hazard such as flood and subsidence on assets and books; and transition risk, i.e. moving to greener business and assets.
4. Pathways for temperature, emissions and climate policies for physical and transition risks in each scenario, alongside macro financial variables to model the impact of the scenarios.
5. Vulnerability of individual counterparties’ business models to climate risks in each scenario.

What is the second round of the cbes?

In February 2022, the Bank of England issued the second round of the CBES. 

This second round comprises a number of questions, requiring all participating firms to provide further information to the responses they submitted in the first round. This will explore the implications of the three climate scenarios to their business models in further detail.

The deadline for submitting these answers is 31 March 2022, with the Bank expected to publish its results in May 2022.

What climate data is available and how can JBA help?

JBA and our partners have helped multiple firms across the financial sector to meet the first round of CBES and are on hand to help firms undertake the second round.

We also offer a suite of climate change data and bespoke consultancy services that can help organisations to understand climate risk outside of these regulatory requirements:

• Our Climate Change Analytics (CCA) data suite can be used to assess potential changes in severity and financial cost of flooding for all RCP climate scenarios and for every 5-year time horizon from 2025 until 2100.
• Our probabilistic UK Climate Change Flood Model, the first of its kind on the market, estimates the frequency, severity and financial cost of flooding under future scenarios.
• Our team of specialists offer bespoke consultancy services for those clients who would like more technical advice or guidance, or who have specific needs beyond the CBES requirements.

Resources to help

We recognise that it can sometimes be difficult to know where to start, so the JBA team is on hand to help you begin your climate change assessment journey, from understanding global regulatory moves to knowing which data is available.

Fill in your details via the form above to speak to one of the team.