The Bank asked firms to consider their exposure to physical risks (arising from higher global temperatures) and transition risks (arising from the move from a carbon-intensive economy to net zero emissions) in three scenarios:
- An Early Action scenario in which the world achieves net zero carbon dioxide emissions by 2050, capping the global temperature rise at 1.8ºC above pre-industrial levels and falling to 1.5ºC by 2100, having decarbonised in a managed and ordered way.
- A Late Action scenario where the same 2050 net zero goal and temperature cap is achieved, though there is no further temperature reduction by 2100 as a result of action being delayed by ten years therefore requiring more drastic measures within a shorter time period.
- A No Additional Action scenario in which no further action, other than that already announced by governments, is taken resulting in a temperature rise of 3.3ºC with the resulting increase in severity and frequency of natural catastrophes.
As is often stated with respect to anything ESG (environmental, social and governance) related, the lack of data (e.g. supply chain emissions) was a real hindrance to insurers’ ability to thoroughly assess climate risks. However, the Bank encourages firms to do the best they can with the information they have – a sentiment with which we would certainly agree – as there simply isn’t the time to wait for a perfect data set. This meant that there were wide variations in the projected estimated financial costs to firms as a result of climate risks – the highest estimate being around ten times greater than the lowest.
Nevertheless, the Bank considers these losses within an acceptable range and would not result in firms’ insolvency, particularly in light of the fact that, in real life, firms would be able to adapt their models as needed over time.
The No Additional Action scenario would, as expected, have the most significant impact with insurers predicting a 50% to 70% rise in annualised losses by the end of the 30-year period – a figure that the Bank considered could be four times higher than insurers had predicted. Interestingly, the Bank noted that those insurers that had more sophisticated models, and were able to adjust these models to the requirements of the scenarios, typically arrived at significantly higher losses.
Insurers stated that the increased claims would lead to higher premiums for consumers and businesses or an inability to offer cover. In this worst case scenario (in which the Flood Re scheme will have ended), the Bank considers that around 7% of households/businesses would have no access to insurance or insurance that is affordable, and the figure may well be higher than this, were this scenario to materialise.
)
)
)
)
)
)
)
)
)
)
)
)
