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

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.

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:

• Read more on the framework for assessing physical climate change risk (pdf)

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

• Read more on the tools for assessing physical climate change risk (pdf)

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

• Read more on the case studies (pdf)

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.

• Read more on the conclusions and recommendations for future development (pdf)

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