Climate risk action plans: Granular gap analysis essential to meeting regulator’s ambition

A granular gap analysis should be the foundation of insurers’ climate risk action plans, says Hymans Robertson, as the PRA’s completion deadline looms. The regulator’s laid out very ambitious goals on climate and there’s a lot to accommodate by the June 2026 deadline.  The gap analysis should be run against the regulator’s Supervisory Statement 5/25: Enhancing banks’ and insurers’ approach to managing climate-related risks. Even well-prepared firms, including those that have significantly invested in their climate capabilities previously, will likely need to adjust their approach to managing climate-related risks warns the leading pensions and financial services consultancy.

A mixture of steps should be taken by insurers to meet the regulator’s goals. These include firms further developing their medium to long-term climate scenario analysis in their Own Risk and Solvency Assessments (ORSAs) and better defining their risk appetites to climate risk. Insurers will also have to analyse the risks to their business models more robustly and set out the management information they’d monitor to inform their management actions and the trigger point for these management actions. Only a granular approach to gap analysis will reveal where adjustments need to be made, adds the consultancy.

Commenting on the value that a granular gap analysis against the PRA’s new expectations will bring, Krish Kistnassamy, Head of GI, Insurance and Financial Services, Hymans Robertson, says:

“Climate risks are becoming so much more evident now that the regulator is right to push for a more rigorous approach from the insurance industry. The PRA’s updated expectations delineate between climate-related risks on the Solvency UK balance sheet and those emerging over a longer time horizon, setting out expectations on risk appetites, climate scenario analysis, data, ORSAs and valuations on the balance sheet. This level of granularity and clarity strengthens internal decision‑making and also demonstrates to the regulator that climate risks are being managed responsibly and proactively.

“The regulator has accepted that insurers shouldn’t be required to maintain a separate risk register for climate-related risks. We agree that many climate-related risks are already captured by life and general insurers on their current risk register. Despite this, insurers can further develop and fine-tune how they capture risks over the medium to long-term. Insurers should also make sure they have adequately factored in climate contributions to existing risks, such as natural catastrophe or climate litigation risks for non-life insurers, and market or credit risk for life insurers.

“Investing in their gap analysis will help insurers make insightful changes over the longer-term and communicate on climate risks with their boards, stakeholders and regulators confidently.”