As of 3 June 2026, the six-month grace period for the Bank of England’s PRA Supervisory Statement SS5/25 expired. Whilst this deadline does not mark the start of any official reporting requirements, it is the date from which PRA supervisory engagement and enforcement action begins in respect of climate related risk. In-scope insurers are now required to evidence or explain, as part of their routine supervisory dialogue, the judgments they have reached regarding climate risk identification, assessment and management response. Identified risks will need to be closely monitored and risk management capabilities developed accordingly.
What does this mean in practice?
The PRA now formally regulates climate related risk as a first-order Prudential Financial risk, meaning it needs to be managed with the same precision and board-level accountability as, for example, traditional credit, market and operational risks. The expectation is that insurers will now demonstrate a ‘forward looking, strategic and ambitious approach’ to embedding climate risk in their daily operations.
Insurers are expected to take a forward looking, strategic and ambitious approach to embedding climate risk into their day to day operations.
The nature of climate-related risk is highly insurer-specific. Insurers will have spent the last six months identifying and assessing the materiality of financial and operational resilience risks stemming from climate change. The process will have focused on physical and transitional risks, as well as climate litigation risks – the latter either akin to physical and transitional risks or an independent risk type, depending on the insurer’s business and risk profile.
Only now can evidence of that internal review be requested by the regulator. Whilst the PRA expects that further work will be required, insurers must set out a timetable for addressing any identified gaps, which is required to be ‘both credible and ambitious’. Ultimately though, an insurer’s risk management response must remain proportionate to its specific risk profile, whilst also being assessed regularly for any material changes.
The integration of climate-related risk
This regulatory development has reinforced the need for climate-related risk to be actively integrated across all teams, executive functions, and board-level governance structures. This is unsurprising given the PRA’s stance that climate-related risk could act as a key driver of underwriting, reserving, market, credit, liquidity and operational risk for insurers (as well as reputational and litigation risks). Insurers should not approach this in silos; the need for effective information sharing across teams is key.
The PRA will now be assessing insurers’ approach to such risks, looking at areas including:
The existence of processes for identifying and assessing the impacts of climate-related risks on the insurer’s business model over the short, medium and long term
Whether the board has a high-level understanding of the impacts of climate-related risks on the insurer’s business model over various time horizons and under different climate scenarios (provision of relevant timely information to be provided by the executive management team) and that appropriate governance structures are in place to manage such risks
The existence of risk assessments, a risk register, and risk appetite framework with appropriate reviews scheduled
An assessment of climate-related risk in both underwriting and reserving teams, to include for example the modelling of non-natural catastrophe claims where there is potential for large claims under liability insurances (particularly where possible claims may emerge under multiple contracts and underwriting years)
The development of processes to consider the impact of capital levels of reasonably foreseeable adverse scenarios (including material climate-related risks) in capital management plans and as part of the ORSA
The impact of all material climate-related risks as part of the Solvency Capital Requirement calculation
How an insurer plans to remedy gaps in climate-related data, with contingency solutions for reliable or comparable data where actual data is not available (the balance between in-house and external data providers specifically referenced, the understanding of any limitations in the latter to be understood)
An assessment of the impact of climate-related risk from the perspective of an insurer’s general operations and their ability to continue providing business services, including where supported by outsourcing and third-party arrangements
The role of Climate scenario analysis
The PRA stresses the importance of climate scenario analysis. For insurers, scenario analysis is routinely deployed across areas including capital setting, risk management, exposure management, and realistic disaster scenario requirements. Whilst many insurers are already conducting both qualitative and quantitative assessments, firms must continue to challenge and review climate risk scenarios across business teams. Such scenarios will need to be updated to reflect up-to-date scientific evidence, modelling advancements, industry practices, national and international climate change commitments, climate tipping points and material climate litigation trends that could impact long-tail and short-tail portfolios. Insurers will, for example, be required to justify their scenario selection and calibration within their regulatory reporting – such as the Own Risk and Solvency Assessment (ORSA) – demonstrating that the rationale for their scenario selection and calibration meets their specific risk profile.
Insurers should continually review and update climate scenarios to reflect evolving science and emerging risks.
Going forwards
The PRA now formally regulates climate related risk as a first-order Prudential Financial risk.
Whilst the setting of business strategy and risk appetite remains the responsibility of insurers, in adherence with SS5/25, insurers must now be ready to defend assumptions underpinning their climate-related risk and business models during upcoming supervisory reviews.
Against the backdrop of a need for reasonableness and proportionality, the focus for insurers will now be on building the capabilities to manage these climate-related risks. This will ensure adherence to the PRA’s primary objectives, whilst allowing insurers to make informed business decisions. Following months of internal review, having a clear roadmap to achieve these goals should ultimately position insurers for long-term operational resilience.
Author
Insurers must now be ready to defend assumptions underpinning their climate-related risk and business models during upcoming supervisory reviews.