How much capital insurers and other financial firms must hold could be directly linked to their readiness to cope with risks from climate change, a senior Bank of England official said on Wednesday.
While insurers have shown resilience in the face of COVID-19, adapting to the longer-term threat of climate change is likely to be a far greater challenge, said BoE executive director Anna Sweeney.
Insurers face several risks from climate change, such as heavier policy claims due to more physical damage from fires and storms, and from the impact on their investments while transitioning to a lower carbon economy.
The kind of once-in-100-years flood in Britain that today racks up industry losses of 7 billion pounds could in future lead to double that figure in damages, Sweeney said.
There is “still some way to go” for a number of insurers in dealing with the impact of climate change on their balance sheets, she said.
“It is therefore possible that the incentives to address climate change risk for both firms and supervisors could be enhanced if it were incorporated explicitly into firms’ capital requirements,” Sweeney told an event held by Moody’s rating agency.
“Whether and how this should be achieved is not an easy question to answer. But it is surely a necessary one, and one that we must begin to address in a timely manner, for insurers and for the wider regulated financial services industry.”