Insurers to be challenged on climate resilience as BoE launches second stress test

The Bank of England (BoE) has launched the second round of the Biennial Exploratory Scenario (BES) exercise on financial risks from climate change, with a warning to insurers they are expected to play a full role in the process.

In a statement to announce details of the BES the BoE said the objective of the Climate BES is to explore the financial risks posed by climate change for the largest UK banks and insurers.

It is the second of the bank’s climate stress scenarios following the first conducted in 2021. All first round Climate BES participants are taking part in the second round, but the regulators were unhappy with the lack of data last year which left them unable to aggregate the results.

“The second round of the BES will comprise a small number of questions, which will further explore participants’ strategic responses to the three scenarios published as part of the first round and the associated implications for their business models,” It said. “Participants will not be required to update the quantitative loss projections they provided as part of the first round of the exercise.”

Banks and insurers have until the end of next month to deliver their second round submissions with the Bank staying it expected to publish the results in May.

Stefan Claus technical head of insurance and the Prudential Regulation Authority (PRA) in a letter to insurance CEO’s written two weeks ago warned that the regulator was disappointed with the results of the first exercise and was expecting better in 2022.

“We expect those firms invited to participate to engage fully and provide comprehensive responses to our requests,” he wrote. “As discussed with relevant life insurers, the first IST in which they participated did not deliver sufficiently consistent results to enable us to publish aggregate results. In 2022, we need to publish aggregate results that will enable us and other stakeholders to assess the resilience of the sector to systemic shocks.”

As such the PRA had made it clear in terms of the response they expect in the coming months.

“Insurers should develop, implement and action an effective stress testing programme,” it said. “Stress testing should assess their ability to meet capital and liquidity requirements in stressed conditions, as a key component of effective risk management. All firms should undertake relevant analysis, equal to the nature, scale and complexity of their business.

“The PRA also expects insurance firms to apply reverse stress testing as part of their own risk and solvency assessment (ORSA) process, to continuously assess their overall solvency needs for their insurance specific risk profile.”

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