To aid in assessing the resilience of the UK financial system the Bank of England (BoE) runs various stress tests, including biennial exploratory scenarios for banks and periodic stress tests for select insurance firms. In 2021 the BoE is seeking to understand the risks presented by climate change across the financial system and for the first time is testing both banks and insurers to capture interactions between them. This is an exploratory exercise, intended partly to develop the capabilities of both the BoE and participants.
The BoE released its Climate Biennial Exploratory Scenario (CBES) in June 2021 with a submission deadline in October 2021; results will be published in May 2022. The CBES uses three scenarios of early, late, and no additional policy action to explore the two key risks from climate change—risks arising from the changes needed to achieve net zero emissions and those associated with higher global temperatures.
The exercise requires named banks and insurers to measure the impact of climate change on insurance liabilities and report the impact using the average annual loss (AAL) and 1-in-100-year aggregate exceedance probability (AEP) metrics.
AIR has provided a guidance document and support pack for clients computing the impact on three region-perils: United States (U.S.) hurricane, Great Britain (G.B.) inland flood, and Japan typhoon. The support pack contains year-event mapping tables and loss modification factors (LMFs) that are fully compatible with AIR’s Touchstone® and Touchstone Re™. The document and support pack can be found here (client login required).
Our studies found that the industry AAL and 100-year AEP metrics typically increase by the order of tens of percent across the scenarios.
AIR offers a consultancy service that provides solutions for additional region-perils, including Europe extratropical cyclone, G.B. storm surge, Australia hail, Australia tropical cyclone, and U.S. wildfire. If you are interested in these or other region-perils, or would like more information about the current document and support pack, please request a consultation.