A recent consultation paper on climate change published by the UK’s Prudential Regulation Authority (PRA) is likely to enhance the long-term risk management of re/insurers, but may conflict with the near-term expectations of shareholders, according to Moody’s.
Moody’s said that, if implemented, it expects the PRA’s proposed standard to improve the risk management of the UK banking and re/insurance sectors and increase their resilience to the adverse financial effects of climate change.
The PRA expects firms to manage climate change-related risk in part by using scenario analysis to assess how their risk profiles and business strategies will be affected and to develop a strategic approach to manage any climate-related risks.
It would also require firms to gauge the likely impact on their solvency and liquidity, and, in the case of insurers, on their claims paying ability.
However, despite expected improvements in overall risk management and strategic positioning, compliance with the PRA’s proposed new standards will add costs and may result in firms forgoing currently profitable business because of the way it might develop over the longer term.
These factors will likely conflict with shareholder expectations and may cause re/insurers some difficulties, although Moody’s does not foresee any immediate credit implications from the PRA initiative.
In Moody’s view, the banking and reinsurance sectors are generally classified in the low risk group with respect to climate change, with the exception of property and casualty (P&C) insurers and reinsurers, who are mainly classified as moderate risk.
Moderate risk refers to sectors with exposure to environmental risk that is broadly manageable, or that could be material to credit quality in the medium to long term (5+ years).
