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UK property insurers need to map the long-term impact of climate change: JBA

9th April 2021 - Author: Katie Baker

Analysts at flood science specialist, JBA Risk Management, have warned that UK property insurers need to start planning how they will map the long-term impacts of climate change on their books.

The warning comes ahead of the confirmation this June of the Prudential Regulatory Authority’s (PRA) detailed reporting requirements on insurers’ climate change resilience, and also JBA’s estimates of up to 30% increase in average annual loss on UK residential property alone by 2040.

The Bank of England’s Climate Biennial Scenario’s latest stress test is the culmination of a number of BoE directives on how banks and insurers should manage the financial risk associated with climate change.

This year it has recognised the direct link between different players in the financial sector including mortgage availability which often depends on insurability.

It wants lenders and insurers to assess risk consistently, especially due to the potential impact on insurability for properties that fall outside of the cover offered by Flood Re, which is due to come to an end in 2039.

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The insurers taking part in the new mandatory stress test are Aviva, AXA, Allianz, AIG, Direct Line, RSA, and ten unnamed Lloyd’s syndicates.

The insurers are joined by some of the UK’s largest lenders, and both have until September to deliver the results of their climate projection work, with the rest of the banking and insurance market to be asked to follow their lead. The PRA is widely expected to include a call for detailed projections up to 2050 on a staggered five-year basis and will publish the results of its analysis in quarter one 2022.

JBA has developed a Climate Change Analytics (CCA) data suite that can be used with its existing UK Climate Change Flood Model to help reinsurers, insurers and brokers assess the physical requirements of the new stress test related to flood, enabling them to assess the long-term impacts of climate change on the risks facing their books of business.

It also has its own climate change model which can pinpoint the impact of flooding on properties at 5-metre resolution, reflecting the highly localised nature of this peril, and its team of specialists and global consultants can work with firms to adapt the model and data to meet specific stress test requirements.

JBA’s currently working alongside ClimateWise, a global network of insurance industry organisations on a new climate change study due for release this autumn. JBA also sits on the Insurance Market Cat Risk and Climate Change group and provides flood data and modelling support to Flood Re.

Nikki Chambers, Technical Director at JBA Risk Management, commented: “The regulator has indicated that climate change impact analysis will become a mandatory requirement for all insurers in the not-too-distant future.

“In a 2020 Dear CEO letter, the PRA laid out the expectation that all firms should have embedded their approach to climate risk by the end of 2021, regardless of stress test participation, and the direction of travel is clear despite the cost implications for the smaller players.

“There are similar moves afoot across the world, with the European Union presently consulting on its stress test requirements due to be brought in in 2022, and regulatory activity in the US, Asia, and China. Closer to home, Ireland is also expected to follow the PRA’s initiative.

“This may be a regulatory initiative but the benefits of understanding future risk should not be underestimated – from supporting new product development plans through to portfolio management and avoiding any knock-on impacts of withdrawing flood cover for specialist customers. We already know from our flood model that for UK residential properties an increase of up to 30% in Average Annual Loss is forecast by 2040, with strong regional differences, so the potential impact on insurers is clear.”

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