Insurers have been told they have to work alongside public entities and governments in making significant strides in the mitigation of the growing threat of climate change.

Speaking during a webinar organised by ratings firm Moody’s, Anna Sweeney, Executive Director, of the Bank of England’s Insurance Supervision Division said the time to take action was now and that the industry needed to ensure it recognised the decades long impact that climate change will have.

“Climate change is one of the most significant and urgent risks facing the whole of the economy, today and for decades to come,” she said. “With the pandemic, we are living through a systemic risk with major impacts on the real economy and consequently the financial services sector.

“While it is hoped Covid-19 will eventually run its course – and hopefully sooner if a vaccine is found – the impact and risks from climate change will be felt for decades to come. And although, insurers have demonstrated resilience to Covid-19 – with the sector remaining robust to downside stresses created by the pandemic – the resilience and successful adaption of the industry to the longer term threat of climate change is likely to be a far greater challenge.”

Ms Sweeney said the Bank of England and UK regulators the FCA and PRA had undertaken a specific climate stress test with insurers last year which highlighted the areas where nor work was needed.

That process would continue as the regulators remain keen to ensure insurers understood the threat and its impact on their balance sheets and those of their clients.

“Insurance companies play a critical role in supporting businesses manage climate-related risks and provide critical long-term finance, such as infrastructure, that support economic growth,” she explained. “Consequently, the resilience and the ability to manage climate-related risks within the insurance industry is of significant importance.

“As a prudential regulator, our primary concern is to ensure the industry remains resilient to down-side stresses. The complexity, global nature and time-horizon of climate risks require greater collaboration in developing and enhancing the industry’s risk management in this area.”

Ms Sweeney said that while the industry understood the threat of physical and transition risks insurers could not ignore the threat of liability risk.

“This refers to risks that could arise for insurance firms from parties who have suffered loss from climate change – for example from firms misreading the transition risk, or who have suffered the consequences of physical risk, and then seek to recover those losses from others who they believe may have been responsible,” she said.

She warned that while frequently considered as a subset of the other two, climate-related litigation and climate legal liability risk has to be addressed.

“Climate lawsuits are increasing globally, often occurring in multiple jurisdictions and arising from a variety of different causes. The potential scope for this type of litigation is broad, and firms all over the world are already beginning to be litigated against for their participation in and/or failure to meaningfully prevent manmade climate change.

“This could lead to significant financial consequences. While current evidence on the impact of these litigation cases is speculative (as climate litigation remains an evolving area which varies considerably across the world), we are looking into the potential consequences of successful rulings to increase in the future, with perhaps one or two ‘landmark’ cases paving the way for these subsequent successes. As the climate emergency continues to evolve, institutions of all types could face increased risk of climate litigation, whether directly via actual case rulings, or indirectly, by providing coverage or credit to exposed corporate counterparties.”

Ms Sweeney said the industry was not being asked to act in isolation adding that any viable solutions would require public/private consensus.

“Insurers and regulators have a shared responsibility to continue to advance their thinking and take action,” she explained. “The most effective response will be one in which everyone plays their part. Furthermore, the prize for those insurers that manage climate change well and are able to understand and price the risks appropriately, is increased business opportunity for innovation that support their customers to adapt and mitigate the changing risks.”

Ms Sweeney warned the consequences of inaction were dire.

“We have set out the roadmap for our journey ahead; climate risk remains a real and credible threat to the integrity and soundness of the global insurance industry which, without significant action now, will only get more pronounced in the future.

“In light of this, the sector must continue to develop and enhance its approach, building on the early foundations of progress which demonstrated a commitment to mitigating the very worst impacts of climate change.

“We intend to provide as much opportunity for this development as possible, utilising our remit both in the UK and internationally to foster preparedness and underline the urgency of physical and transition risks.”

“The best response will encompass both of these aspects; private and public actors must equally play their part to help rewrite the climate narrative unfolding on the horizon,” added Ms Sweeney. “Our challenge is significant, and our work is far from complete; however, it is not too late to change course, in fact, our future depends on it.”