Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2 degree world. To draw out these crucial points consider the Bank of England’s current approach to the insurance sector. As regulator of the world’s third largest insurance industry, the PRA is responsible for protecting policyholders and ensuring the safety and soundness of insurers. Our supervision is forward-looking and judgement-based. It is risk-based and proportionate – tailored to different business models around the sector – and considers both business-asusual and whether a firm can fail safely – recognising that “zero failure” is neither desirable nor realistic. Our supervisors take a view of your business plans, risk management, governance, and capital models. Where the PRA judges that it is necessary to intervene it does so sooner rather than later. While our mandate is to protect policyholders – many of whom are local – we are conscious that international competition needs robust and internationally-consistent regulatory standards. Solvency II is a good example. It is a prudent but proportionate Directive, that embodies the core principles of our domestic standards and embeds them more consistently across Europe while replacing a patchwork of local regimes. Another example of how best practice is converging globally is the FSB agreement last week on HLA for global systemic insurers, as well as its support for the IASB completing its new insurance contracts standard. The UK insurance industry is well-prepared for such developments.
Participants in the Lloyd’s market know all too well that what appear to be low probability risks can evolve into large and unforeseen costs over a longer timescale. Claims on third-party liability insurance – in classes like public liability, directors’ and officers’ and professional indemnity - could be brought if those who have suffered losses show that insured parties have failed to mitigate risks to the climate; failed to account for the damage they cause to the environment; or failed to comply with regulations. 17  Discussions on correlation are not new. For example, a current issue is the extent to which European windstorms occur in clusters, such as windstorms Daria, Vivian, Wiebke and Herta in 1990 and Lothar, Martin, and Anatol in 1999. 18  See Standard and Poor’s – “Climate Change Could Sting Reinsurers That Underestimate Its Impact” (2014). 19  In 1992 after Hurricanes Andrew and Iniki hit the US, the price of reinsuring weather risks spiked and several carriers left the market, leading to a rise of up to 40% in premiums in some parts of Florida. A series of hurricanes affecting the Bahamas has prompted several insurers to withdraw flood cover for low-lying areas. 6  BIS central bankers’ speeches  Asbestos alone is expected to cost insurers $ on a net ultimate claims basis in the United States – equivalent to almost three Superstorm Sandy-sized loss events.