Insurers must embrace climate change stress test warns expert as data indicate potential 30% increase in average losses by 2040

All UK property insurers need to start planning now how they will map the long-term impact of climate change on their books. JBA's warning comes ahead of the confirmation this June of the Prudential Regulatory Authority’s (PRA) detailed reporting requirements on insurers’ climate change resilience and JBA’s estimates of up to 30% increase in average annual loss on UK residential property alone by 2040.

The latest stress test, which is part of the Bank of England’s Climate Biennial Scenario, is the culmination of a number of BoE directives on how banks and insurers should manage the financial risk associated with climate change. This year it recognises the direct link between different players in the financial sector including mortgage availability which often depends on insurability. It wants lenders and insurers to assess risk consistently, especially due to the potential impact on insurability for properties that fall outside of the cover offered by Flood Re which is due to come to an end in 2039.

Aviva, AXA, Allianz, AIG, Direct Line, RSA, and ten unnamed Lloyd’s syndicates will be taking part in the new mandatory stress test on climate change. The insurers are joined by some of the UK’s largest lenders, and both have until September to deliver the results of their climate projection work, with the rest of the banking and insurance market to be asked to follow their lead. The PRA is widely expected to include a call for detailed projections up to 2050 on a staggered five-year basis and will publish the results of its analysis in quarter one 2022.

The regulator has indicated that climate change impact analysis will become a mandatory requirement for all insurers in the not-too-distant future. In a 2020 Dear CEO letter, the PRA laid out the expectation that all firms should have embedded their approach to climate risk by the end of 2021, regardless of stress test participation, and the direction of travel is clear despite the cost implications for the smaller players. There are similar moves afoot across the world, with the European Union presently consulting on its stress test requirements due to be brought in in 2022, and regulatory activity in the US, Asia, and China. Closer to home, Ireland is also expected to follow the PRA’s initiative.

This may be a regulatory initiative but the benefits of understanding future risk should not be underestimated – from supporting new product development plans through to portfolio management and avoiding any knock-on impacts of withdrawing flood cover for specialist customers. We already know from our flood model that for UK residential properties an increase of up to 30% in Average Annual Loss is forecast by 2040, with strong regional differences, so the potential impact on insurers is clear.

JBA Risk Management has developed a Climate Change Analytics (CCA) data suite that can be used with its existing UK Climate Change Flood Model to help reinsurers, insurers and brokers assess the physical requirements of the new stress test related to flood, enabling them to assess the long-term impacts of climate change on the risks facing their books of business. JBA’s probabilistic climate change model can pinpoint the impact of flooding on properties at 5-metre resolution, reflecting the highly localised nature of this peril, and its team of specialists and global consultants can work with firms to adapt the model and data to meet specific stress test requirements.

JBA Risk Management already provides data and modelling to almost 90% of UK property insurers and a number of major brokers and reinsurers. It is presently working with ClimateWise, a global network of leading insurance industry organisations convened by the University of Cambridge Institute for Sustainability Leadership, on a new climate change study due for release this autumn. JBA also sits on the Insurance Market Cat Risk and Climate Change group and provides flood data and modelling support to Flood Re.

We welcome the PRA’s moves to develop guidance that helps insurers and lenders assess their risks from climate change. The encouragement this provides for both insurers and lenders to challenge assumptions about the future availability of insurance without effective adaptation is of particular importance. Building a common understanding of potential long-term impacts from flooding on their existing and future portfolios will be central to the future security of people and profits.

While this is a regulatory-led initiative, there are clearly multiple business benefits from gaining a much more granular understanding of the longer-term impacts from climate change on both existing and future portfolios. Access to comprehensive data like JBA’s is critical to the development of products that are designed to address the present, medium and long-term potential impacts from flooding.

The introduction of these reporting requirements is a complex and time-consuming task for the insurance market, but we have developed these tools in collaboration with insurers to support them in meeting their obligations in terms of flood risk, both now and in the future. We can provide a bespoke and tailored service to meet all insurers’ needs and our team of specialists are continuing to develop our global and UK capabilities, including an updated UK Climate Change Flood Model in early 2022.