Published on
22 May 2019
With a foreword Opens in a new window from David Rule (Executive Director of Insurance Supervision and sponsor of the working group), one-page executive summary Opens in a new window, and short introduction Opens in a new window, this report has been written by a cross-industry working group to outline a framework for practitioners in the general insurance sector to use to assess the financial impacts of physical climate change.
Framework for assessing physical climate change risk
This chapter describes a framework designed to assess physical climate change risk for the general insurance sector. It aims to be practical and should help answer the question: how could the decision/business processes be impacted given a range of possible climate outcomes?
It goes through each stage of the framework:
Stage 1
Identify business decision(s)
Stage 2
Define materiality
Stage 3
Background research
Stage 4
Assess available tools
Stage 5
Calculate impact
Stage 6
Reporting & action
Tools for assessing physical climate change risk
This chapter details the four categories of tools that can be used to assess physical climate change risk, providing an overview of how they might be used to aid assessments of the impact of climate change.
The four categories of tools are:
i) Expert judgement
ii) Hazard maps
iii) Footprints
iv) Catastrophe models
Case studies
This chapter provides six case studies that illustrate the application of aspects of the proposed framework:
| Case study | Business Decision & Horizon | Territory/Peril | Assessment tools used | Provided by |
|---|---|---|---|---|
| A | Pricing by 2030 | US Surge component of US Hurricane | Catastrophe model | RMS |
| B | Underwriting by 2040 | UK Flood | Catastrophe model | JBA |
| C | Public policy engagement by 2079 | UK Windstorm | Catastrophe model | AIR |
| D | Pricing and risk selection by 2040 | UK Flood, US Flood | Hazard maps | Ambiental, Fathom, JBA |
| E | Risk appetite by 2040 | Japan Typhoon and flood | Footprints | AIR |
| F | Strategic decision making by 2030 and 2100 | Wind flood and surge components of US Hurricane; Germany hail and California wildfire | Catastrophe model, expert judgement and footprint | SCOR, KatRisk, Guy Carpenter |
Conclusions and recommendations for future development
This report sets out a practical framework that can be used to assess financial impacts from physical climate change risk for general insurance firms. Such assessments can leverage existing tools already in use by the insurance industry. This report has demonstrated how expert judgement, hazard maps, footprints, and catastrophe models can be tailored to address practitioners’ needs, depending on the data available, the business need in question and the required output metrics.
Feedback and next steps
The working group obtained feedback and views on the framework between April and November 2019 through a dedicated email inbox and in-person meetings. The feedback received was collated and discussed by the working group in 2020, you can read the response on the ‘Response to the general insurance industry – A framework for assessing financial impacts of physical climate change’ page. Please note the response is a summary of the industry feedback received rather than PRA expectations.
A framework for assessing financial impacts of physical climate change Opens in a new window