A framework for assessing financial impacts of physical climate change: A practitioner’s aide for the general insurance sector

A practitioner’s aide for the general insurance sector written by a cross-industry working group.
Published on 22 May 2019
With a foreword from David Rule (Executive Director of Insurance Supervision and sponsor of the working group), one-page executive summary, and short introduction, 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.
  • Working group members and editors

    Working group members

    Alastair Clarke, AIR 
    Shane Latchman, AIR 
    George Longfoot, Ambiental
    Katie Smith, Ambiental
    Mark Nunns, Ambiental
    Ben Carr, Aviva
    Andrew Smith, Fathom
    Jessica Turner, Guy Carpenter & Lloyd’s Banking Group
    Jane Toothill, JBA Risk Management
    Sarah Jones, JBA Risk Management
    Stefan Eppert, KatRisk
    Kirsten Mitchell-Wallace, Lloyd’s of London
    Emma Watkins, Lloyd’s of London  
    Juan Duan, PRA
    Elisabeth Cannizzo, PRA
    Giorgis Hadzilacos, PRA
    Jennifer Bell, PRA
    Ryan Barrett, PRA
    Sini Matikainen, BoE
    Joss Matthewman, RMS & Hiscox
    Nicola Howe, RMS
    Steve Jewson, RMS
    Junaid Seria, SCOR
    Miroslav Petkov, Standard & Poor’s

    Editors

    Shane Latchman, AIR
    Juan Duan, PRA
    Elisabeth Cannizzo, PRA
    Giorgis Hadzilacos, PRA
    Amanda Istari, PRA
    Joe Bragger, PRA 
    Jane Toothill, JBA Risk Management

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:

paper with cog clock

Stage 1

Identify business decision(s)

clipboard

Stage 2

Define materiality

research

Stage 3

Background research

pencil and ruler

Stage 4

Assess available tools

calculations

Stage 5

Calculate impact

giving a presentation

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 is keen to get comments and views on the framework. The PRA has set up an email address for responses, which it will monitor so that emails are shared with the working group for discussion. Responses are requested by Friday 22 November 2019. Please send any comments or enquiries to PCCriskframework@bankofengland.co.uk. We may not respond to individual emails, however, we will consider how we collate and share feedback received.

PDFA framework for assessing financial impacts of physical climate change

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