Insurance Directorate

PRA Climate Stress 2019

Observations and Key learnings
February 2020

Stefan Claus & Giorgis Hadzilacos, PRA

Insurance Stress Test: broader context

• PRA carries out insurance stress test every 2 years: 2015, 17, 19,…
Sectoral Firm supervision

• Objectives • Sector resilience

• Systemic risks / sectoral behaviours
• Effectiveness of risk management
• View on capital
Not for setting
Capital!
• Counterparty dependencies • Assessment of modelling
• Exploratory risks / horizon scanning approaches

Section A
• Design
• Common component across life & general insurers (economic factors)

Section B • Business model specific: Eg. life – mortality; GI – NatCat risks

Section C • Exploratory: Eg. climate, cyber, solar flares,…

Apr Jun/Jul Sep / Oct March

2020
• IST timeline 2019 2019 2019

Request for Firm Market

Formal launch
technical input submissions feedback
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Climate scenario: Overview
Objective: Provide market impetus and support Bank’s approach to developing
scenarios

Part 1: prescribed shocks Part 2: Qualitative description

under three scenarios
Firms consider financial impacts on
selected metrics under three
hypothetical greenhouse emission
scenarios split between physical and
transition risk affecting both
liabilities and assets
of own scenarios
Asks firms to provide qualitative and
quantitative information on any climate
scenarios and related assumptions that they
have already developed
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Climate pathways considered

 Scenario A, disorderly
 Scenario B, orderly (Paris
Emissions

Agreement)
 Scenario C, ‘hot house’

2022 2050 2100

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 Design considerations
Scenario
narrative
External
climatic factors Climate
Broad economic factors Financial Risk
IST2019 provided Forum
greater guidance – (eg GDP)
potentially at
expense of Sector implications
individual firm
approaches / views
Individual counterparties implications

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Other core design choices
• Time value of money: no discounting
• Instantaneous shock on same year end Balance Sheet (31/12/2018) – i.e. no compounding
• Life and GI investments – all
• Only GI property cat Liabilities and key peril zones for UK regulated entities (US and UK Nat Cat)
• GI Liabilities: Gross of reinsurance
• Explicitly excluded Life liabilities (morbidity and Longevity) and GI Professional Indemnity/legal liability
exposures
• Excludes dependency between assets and liabilities
• Focused on 1st order climate impacts (e.g. did not include finance sector lines, responses from Central
Banks)

• Separate out physical and transition risks (note: no transition risk under scenario C)
• Firms to provide view on
• How market values / price of risk could change [i.e. change in MV for investments and AAL for liabilities]
• How perceived view of risk could change [i.e. change in 1-in-100 VaR for Investments and 1-in-100 AEP for liabilities]

Design choices reflect purpose of the exercise: developing capacity / sizing risks, not assessing capital
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Qualitative findings

For firms: For PRA:

Significant gaps in data, Top-down design choices overly

tools and expertise influence results

Current model designs Granular results improve

constrain scenario outcomes comparability

Climate risk management Benefit of having a second round

not yet embedded of submissions
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Transitioning to the BES
Supervisory
Statement 3/19:
‘Enhancing banks’
and insurers’ Dear CEO Letters
June ‘19 Q3 ‘20
‘Impact of 2015 approaches to Communicating
Climate managing the the results from
Change to UK financial risks the climate stress
Insurance from climate to the industry
industry’ change’

Tragedy of
Climate Scenario BES 2021
the horizon,
analysis Stress testing for
Mark Carney
As part of PRA’s the Financial
2019 Insurance Sector (for
2015 April ‘19 Stress Tests March ‘20 insurers this will
build on IST 2019)

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NGFS 1 – Framework and Timeline

• Scenarios Framework introduced in

April 2019
• New category of disorderly scenarios
• Summarised orderly scenarios into
two categories – where climate goals
are met or not met

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 April /
NGFS 2 – Variables Global climate
April November
Macro damages
simulations
• Global temperature pathways • GDP
• Global coastal, agricultural, water, • Adaptation assumptions
• Mortality
Global NGFS Scenarios health impacts – regions affected
• Extreme weather damages

April /
April November
Global transition
Macro damages
scenarios
• Regional carbon price pathways • GDP
• Regional emissions / technology • Interest rates
pathways for sectors • Global consumption /
• Global energy and commodity investment
prices

UK+ physical perils

For key regions
• Flood risk, sea level, subsidence
Additional data for key projections UK+ financial
• Regional temperature, extreme
UK+ macro pathways
regions (eg. UK) modelling
heat and freeze
• Atlantic hurricanes • GDP by sector • Bond yields
• Unemployment • Equity prices
• Bank rates
UK+ transition risks • Residential / corporate
property prices
For key regions • Household income
• Sectoral emissions • Corporate profits
• Specific government policies • Trade flows
• Regional demand for key
technologies 10
Q&A

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