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The Bank of England’s Climate Biennial Exploratory Scenario (CBES) exercise launches in June, with submissions required by the end of September 2021. Less than four months remain until the official launch, so the Bank of England (BoE) is engaging early with invited insurers and banks to ensure they understand the direction and scope of the assessment.

Announced in December 2019, the BoE’s stated objective for the CBES is “to test the resilience of the current business models of the largest banks, insurers, and the financial system to the physical and transition risks from climate change. The exercise will provide a comprehensive assessment of the U.K. financial system’s exposure to climate-related risks and therefore the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient.”

In many respects, we believe this exercise takes the logical next step from the BoE’s 2019 General Insurance Stress Test (GIST), which included an exploratory exercise to establish the impact of three climate change scenarios on both the value of investments and potential liabilities arising from physical risk and transition risk from U.S. hurricanes and U.K. flood events. Each scenario varied in timescales and severity and was based on the global action to transition to a low- or no-carbon future.

Early details have emerged, including scope on the three climate scenarios (No Additional Policy Action, Early Policy Action, and Late Policy Action) and the variables to be used in the CBES. Knowing that the CBES will be released in June, what can the intended recipients do now to prepare?

Responding to Climate Change Regulations

The GIST presented a new challenge to many of our clients. We soon learned that thinking beyond that traditional risk period, even through to the year 2100, required a different approach. RMS partnered with many clients to help with their submissions to the BoE using risk models that were modified to reflect the specified criteria scenarios.

We expect that many lessons from the GIST will shape the upcoming CBES. Though details are still to be fully defined, it is safe to assume that the CBES will remain focused on testing the vulnerability of today’s balance sheets to climate change. In addition, it will likely evaluate how a business might adapt their business model over the length of a given scenario.

Participants can expect the CBES will be bigger and more complex and the demands will be greater. Climate science has also moved fast and, to match, so will the modeling capabilities. The scenarios will again focus on the impact from climate change on physical and transition risks, though they will be broader in scope. One key difference will include recognizing the wide-ranging impact of climate-related financial risks, through multiple possible pathways and climate outcomes. This will require participants to analyze multiple scenarios over a longer time frame.

Preparing for the CBES

RMS has been here before. In addition to helping clients with the GIST in 2019, we have also worked with (re)insurers and regulators to assess the impact climate change factors have on physical risk. Clients such as QBE wanted to understand how their insurance portfolio would be impacted by recognized IPCC climate change pathways, using adjustments to RMS models.

RMS climate change timeline
Figure 1: Key RMS climate change milestones

From our experience working with many clients, we have five thoughts on what all (re)insurers – not just those that have to respond to the CBES – should start to do now with regard to assessing the changes in physical risk from climate change:

  1. Build for the future: Exercises such as the CBES aren’t the first and certainly won’t be the last climate change reporting demands from a regulator. Using a partner who can help build foundations for the longer term makes clear business sense. This partner can also provide expertise to accommodate new demands, introduce repeatable processes, and move away from just answering the test toward something much more sustainable.
  2. Make it business as usual: Although perhaps novel at the moment, climate change needs to be embedded in your processes and in the mainstream. Use an approach that enables climate risk analytics to be folded into your day-to-day workflows, since at some point it is quickly going to be a core requirement.
  3. Ensure consistency with your present-day views of risk: Separated views may work in the short term, but a single view of risk will help as you build sophistication in your approach, to understand future capital positions in a consistent manner.
  4. Develop capacity and understanding of the problem: Many of our clients are moving along their climate change analytics journey to understand the issues, risk drivers, challenges to their business, and potential mitigation strategies. Now is the time to make smart investments to kick-start climate change knowledge capacity in your business.
  5. Differentiate your business: Climate analytics can offer areas of competitive advantage, so use this as an opportunity to lead on climate change. Go beyond the standard requirements to generate views that reflect your portfolio, rather than industry averages. Risk varies by region, and correlation across portfolios is critical. Ours is an industry that prides itself on sophisticated climate risk management and can embrace climate change to move toward a gold standard.

There is not long to go until the CBES is published, so it’s time to start planning now. If you need any help, talk to us. Consider us a partner who has already had success responding to regulators and can help your business build a long-term strategy – so you can understand and start to address challenges posed by climate change.

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Joss Matthewman
Joss Matthewman
Senior Director, Product Management and Strategy, RMS

Joss Matthewman recently rejoined RMS as Senior Director of Product Management and Strategy, leading on RMS’s climate change activities. Prior to this, Joss was Head of Catastrophe Exposure Management at Hiscox, responsible for natural catastrophe, war, terror, and political violence exposure management and reporting across the group.

Before joining Hiscox, Joss spent seven years in model development at RMS, where he worked on the RMS North Atlantic Hurricane and Asia Typhoon models, before being appointed Head of Storm Surge Modeling. During this period Joss joined the PRA working group on climate change which he continues to engage with today.

Prior to entering the insurance industry Joss obtained a PhD in Applied Mathematics from UCL and worked as a postdoctoral researcher in climate science at the University of California, Irvine. His published areas of research during this time include stratospheric sudden warmings and the impact of sea-ice on global atmospheric teleconnections.

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