Given this combination of immediate physical risks and prospective transition risks, the Bank of England has become increasingly active consistent with our financial stability and prudential mandates. In 2015, we examined the impact of climate change on the UK insurance industry.6 General insurers and reinsurers are on the front line of managing the physical risks from climate change, and they have responded by developing their modelling and forecasting capabilities, improving exposure management, and then adapting coverage and pricing accordingly. One of the lessons they have taken on board is that yesterday’s tail risk is closer to today’s central scenario. Sadly, with respect to climate, history repeats not as farce but as tragedy, with growing frequency. Despite the sophistication of insurers, there are some gaps in their risk management. The Bank is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side. With that in mind, we expect firms to consider stress testing and scenario analysis as part of their assessment of the impact of climate risk on their balance sheet and broader business strategy. This will also be reflected in our own market-wide insurance stress test exercises. For banks, the financial risks from climate change have tended to be beyond their planning horizons.
Parallel to this development, the upward trend in unemployment rates reversed. In the mentioned period, unemployment rates increased in annual terms while they decreased compared to the second quarter in seasonally adjusted terms (Figure 30). Indicators such as capacity utilization rates and per capita hours worked suggest that resource utilization remains low throughout the economy. Given that ample slack would continue to be an obstacle to investment and employment, recent signs of improvement in employment data is not expected to turn into a significant recovery, suggesting that unemployment is likely to remain elevated for an extended period of time. Therefore, unit labor costs and domestic demand would continue to support disinflation. Figure 30: Unemployment Rates (Seasonally Adjusted, Percent) 19 Nonfarm Unemployment Rate 17  Unemployment Rate  15 13 11  0709  0509  0309  0109  1108  0908  0708  0508  0308  0108  1107  0907  0707  0507  0307  0107  9  Source: TURKSTAT, CBRT. BIS Review 143/2009  13  As I have mentioned before, the tightness in credit conditions has been on an easing trend. Accordingly, developments in the credit market would begin to support domestic economic activity as of the fourth quarter of the year and the impact of monetary policy is expected to be more visible in the medium term. However, the rising domestic borrowing requirement of the government, ongoing problems in the global economy, and elevated levels of unemployment would continue restraining credit expansion.