BoE demands climate answers from insurers

The Bank of England has written to dozens of insurance companies to assess the risk that climate change poses to their solvency and earnings, in a sign of regulators’ concern about the potential financial fallout of global warming.

In an unusual move for a central bank, it has asked about 30 insurers if they knew when changing temperatures or more frequent extreme weather disasters might start affecting “the viability of your business model”, the Financial Times has learnt.

The letter from the bank’s Prudential Regulation Authority, seen by the FT, also asks if companies have considered the way climate change could affect their investment portfolios.

The authority, which is responsible for the safety and soundness of 1,700 financial firms, hints at possible regulatory requirements, asking what insurers think of “the role of insurance regulation” in relation to climate change.

Scientists have been warning for years that greenhouse gas emissions from burning fossil fuels are driving warmer global temperatures and could increase the frequency of devastating natural disasters such as Typhoon Haiyan, which killed thousands of people when it ploughed into the Philippines last year.

But the Bank of England appears to be one of the first central banks to address potential climate risks for insurers.

The insurance industry is doubly exposed to such threats. First, it faces rising payouts to policy holders battered by natural catastrophes that have caused average global insured losses of $56bn a year over the past decade, according to Munich Re.

However, it also invests in assets that could be affected by such disasters, such as properties, and fossil fuel companies facing tougher government rules on greenhouse gas pollution, like those the US launched this year to reduce power plant emissions.

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The UK insurance industry is the third largest in the world and manages investments of £1.8tn, according to the Association of British Insurers.

The BoE said it had decided to survey insurers across the life and general insurance sectors in response to an invitation from the UK environment department, which is carrying out a climate assessment.

It said it had decided to accept the invitation because of “the importance of the topic”, and planned to hand its findings to the department next year.

The bank also confirmed reports that its governor, Mark Carney, told a World Bank seminar in October there was analysis showing most fossil fuel reserves are “unburnable” if the world is to avoid risky climate change.

Executives from one large insurer, Aviva, welcomed Mr Carney’s remarks and said the company had given a comprehensive response to the bank about how it managed climate risks.

“We understand the commercial consequences of climate change for the insurance sector,” said Steve Waygood, responsible investment chief at Aviva Investors, the asset manager owned by Aviva, who worked on the insurer’s response to the Prudential Regulation Authority.

It’s clear that a reliance on a future repeating the past is not valid for dealing with climate change

But Mr Waygood added: “The government can’t expect the insurance industry to do its job of dealing with climate change. It’s the job of global governments to correct the market failures that exist. They cannot regulate us into doing that for them.”

The Carbon Tracker think-tank, which argues the UK’s exposure to high carbon investments could pose systemic financial risks, also welcomed news of the bank’s move.

“It’s clear that a reliance on a future repeating the past is not valid for dealing with climate change,” said Carbon Tracker founder, Mark Campanale.

Jon Williams, a partner at PwC, the professional services group, said the bank eventually might need to look at the banks and investors it also supervises.

“I understand you might start with insurance because it seems to be the most obvious part of the finance sector to be exposed to climate change,” he said, but the financial system is so interlinked that all parts of it need to be considered.

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Letter in response to this report:

Did BoE issue an earlier warning to insurers? / From Matthew B O’Brien