Mission (Im)possible: Scenario analysis of climate change financial risk
Many CEOs, chief risk officers and senior managers responsible for climate change throughout the insurance industry are still unclear as to what is a “proportionate approach, in line with the resources available” when it comes to climate change.
Isaac Alfon, Camelot member & expert within risk management and regulation (FSA and HM Treasury) explains how developing a proportionate approach to scenarios and sets out 6 specific suggestions to develop a qualitative analysis of climate change impacts.
Background – The PRA published a dear CEO letter on climate change financial risk in Jun 2020 following their expectations in April 2019. The PRA’s expectations are grouped in four categories: risk management, governance, scenarios and disclosures. The PRA has also highlighted that insurers should adopt a proportionate approach, in line with the resources available.
The letter shares what the regulators have learnt about how banks and insurers are implementing the PRA expectations for climate change financial risk, provides examples of good practice and sets out a deadline of end 2021 for embedding their approaches to manage climate related financial risk.
The challenge is how to start.
In this article, Isaac Alfon builds on the notion of walkthrough scenario, identified in the PRA dear CEO letter, and identifies 6 practical tips to start the journey including:
- Scenario analysis of climate change financial risk expected by the PRA may seem like mission impossible but it’s not.
- You can make considerable progress by reading Isaac’s tips set out in the article, like starting with a business perspective rather than a balance sheet perspective.
- Simplify as much as you can.
- Recycle & updated what you already have on climate change.
- See “key findings and conclusions” of the paper for a summary of the six tips.
Make sure you put the kettle on & have some quiet time to read the paper. Isaac makes a thorough analysis of the situation and outlines a number of steps on how businesses can make headway.