Insurers need to account for the potential devaluation of investments as well as a likely upsurge in climate-related litigation as part of the way they consider climate risk, a senior UK regulator has said.
In a speech delivered last week, Anna Sweeney, executive director of the insurance supervision division at the Bank of England, highlighted that climate risk facing insurers extends beyond their direct exposure to physical risks arising from extreme natural catastrophes and the indirect impact that has on businesses.
Sweeney said transition risks arising from "the process of adjustment towards a lower-carbon economy" could raise particular financial risks for life insurance providers.
"In order to make that transition, there will have to be new government policies, changes to customer preferences, and the introduction of new technologies," Sweeney said. "These will have an impact on the value of financial assets. Indeed, there is a real risk that some of the long-term assets that life insurers hold to support future pension benefits could substantially fall in value. Understanding the longer term strategy of an insurer’s most significant investments will be needed to fully understand the potential effect of transition and physical risks."
Risks to insurers' resilience stemming from the climate crisis could also emerge from an increase in legal claims, she said.
"Climate lawsuits are increasing globally, often occurring in multiple jurisdictions and arising from a variety of different causes," Sweeney said. "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," she said.
Sweeney said insurers will need to work "in tandem" with financial regulators and businesses across sectors to address climate-related risk.
Insurance law expert Charlotte McIntyre of Pinsent Masons, the law firm behind Out-Law, said: "Climate change represents an enormous challenge for us all but we have seen, over the past few years, the insurance industry rise to meet it with focus and determination. Ensuring that the industry can continue to offer effective cover for increasing climate-related risk is critical for how society itself will adapt to dealing with climate change."
"It is clear that those insurers which put consideration of climate-related risks at the heart of their governance, oversight and control and risk management structures will be in the best position to successfully do this. The insurance industry has a long tradition of adapting and innovating to successfully meet new risks: in doing so, it is adept at creating opportunity for innovation and growth at the same time," McIntyre said.
Contact an adviser
