On Monday 13th March, the Bank of England (BoE) published a report setting out its latest update following up on the call for papers issued ahead of the October Climate and Capital conference, the conference itself, and additional internal work from the PRA. This report does not set out any policy changes but rather describes the Bank’s latest thinking on climate-related risks and regulatory capital frameworks and areas of future work. The report notes that although some insurers and banks have made significant progress in embedding climate risks within risk frameworks, the level of progress varies, and all firms need to make further progress. The Bank also noted that better, more effective risk management controls within firms are likely to reduce the amount of capital required for future resilience.
Insurers need to embed Exposure Management in many aspects of their vision and strategy to support underwriters.
On specific capability gaps, this report provides limited additional information on capability gaps when compared to the PRA’s October 2022 Dear CEO letter, but rather calls for more research / analysis from the academic and corporate communities, as few submitted papers ahead of the October Climate and Capital conference tackled the challenges of incorporating climate risks into capital frameworks. The BoE notes in its paper that “As a short-term priority, the Bank is focused on ensuring firms make progress to address ‘capability gaps’ to improve their identification, measurement, and management of climate risks”.
On regime gaps, based on all the analysis / thinking to date, the BoE’s current thinking is that the modelling of climate risks requires more reliance on forward-looking approaches to capital setting than other risks, which will include more use of stress and scenario testing. However, one of this report key conclusions is that, based on evidence provided to date, the time horizons currently used in capital setting are appropriate for climate risks, therefore a change to this component of the capital regime is presently unlikely.
How WTW can support
Building and embedding climate risk management
WTW can support firms in building, implementing, and embedding climate risk management within firms’ wider risk management frameworks. WTW has worked with a wide range of insurers across the industry to develop climate risk management approaches which capture the uniqueness of this risk, and how it impacts other traditional risk categories.
The WTW approach ensures consistency with the wider risk management framework, rather than being an isolated ‘bolt-on’. WTW also ensures that the approaches are embedded across the business, leveraging existing resources and specialisms across the 3 lines of defence to deliver forward-looking and efficient risk management.
Gap analysis and recommendations
WTW has worked with a range of insurers to develop, implement, and embed climate risk management approaches. WTW can leverage this experience to assist insurers in understanding how their current approaches compare with the wider market and provide actionable, practical recommendations to reach best practice.
WTW is a strong contributor to research and regulatory consultations in this area, and we are continuously developing our offering to clients to ensure they remain at the forefront of strong risk management.
Incorporating climate risks in capital models
As approaches to modelling climate risks develop, and as noted in the BoE report, stress and scenario testing is likely to be a key component of the capital setting process for climate risks. We expect firms’ management teams and Boards will want to understand how climate risks may impact the firm’s capital requirements in the near future and the longer term.
As an industry leader in capital modelling and having worked with a wide range of insurers in developing robust capital models, WTW can support firms in incorporating climate stress and scenario testing into capital models to understand how the capital position may be impacted based on a range of transition scenarios and emissions paths. We will work with clients in selecting and refining appropriate scenarios which are plausible and relevant to their risk profile (which would include leveraging climate scenario analysis performed in other parts of the business), and use the results from this scenario analysis to inform management and the Board on the likely impact of climate risks on their capital requirements and capital setting processes, as well as provide practical recommendations for further refinements with the view of, where appropriate, reduce capital requirements held in respect of climate risks.
Parameterisation of climate scenarios
WTW can support firms in developing appropriate climate scenarios, which reflect their risk profiles, and leverages WTW’s industry expertise and academic research to ensure plausibility, timeliness and usability.
WTW has a team of climate experts whose combined expertise covers all business and risk areas, and has access to the right, latest data and technology to support both the parameterisation of climate scenarios and the implementation of those in a way that minimise internal changes by adapting to the firm’s business structure and risk management processes, and provides meaningful value-add to clients.
Contacts
