Understanding the value of climate risk data
Understanding the value of climate risk data
Andrew
Change is happening. We are seeing significant activity in the financial sector from insurers to banks concerning their approach to climate change. It is now widely accepted that climate change is resulting in rising sea-levels and temperatures but how exactly does it impact on risk analysis undertaken by lenders? Adverse weather events cause devastation and the recent damage caused by Storm Ciara, Dennis and Jorge is a reminder of the loss potential of large single events. The Association of British Insurers (ABI) estimated a clean-up bill of £363 million to victims of the bad weather caused by these storms. Some £214m is going on flood claims and £149m is being used to repair windstorm damage. There were 1,500 commercial property flood claims put at £85m and 9,000 commercial property claims, put at £61m.
These events not only raise the awareness of climate change but also its critical impact on insurers’ financial stability. This in turn affects lenders approach to mortgages because the damage – or the potential for it – can impact the bank’s approach to credit risk. Credit risk management is very important because it is an integral part of the loan process. Lack of understanding of effective climate related risks and the acceptable risk management strategies poses a real threat to both banks and their customers’.
It’s time to be prepared
For lenders to be prepared, it is crucial to identify the potential effects of climate change on land and property and its resulting future value. Windstorms can be just as damaging as flooding so the impacts that need to be assessed are wide ranging and not limited to excessive rainfall. Other areas to consider when undertaking risk assessments include subsidence risk and coastal erosion. Only this week the biggest rockfall in 60 years has been reported on the Jurassic Coast as 4,000 tons of rock dropped into the sea. It is believed to have been caused by natural erosion and the recent mixture of warm and then cold weather.
The regulatory impact of climate change is going to be substantial and wide-reaching. The 197 countries, such as the UK, that signed up to the Paris Agreement are aiming to achieve a 40% Greenhouse Gas reduction by 2030. As governments strive to reach their targets, legislation will undoubtedly follow, and we know here in the UK the PRA deadline is looming fast for banks to embed climate change into their risk management processes.
Banks and financial institutions are being held accountable by the PRA who have laid down strict guidelines making it mandatory for lenders to map out their plans by June 2021. Participants in the 2021 Biennial Exploratory Scenario also need to model their balance sheet exposure using climate projections. The PRA has said it will be paying particular attention to the metrics and targets that firms are using, their comparability and how they are incorporated into risk and governance frameworks.
So, what needs to be done?
Banks are already actively working towards these targets and detailing their commitment to climate change and sustainability. Many already have the data they need that shows the threat of climate change to their portfolios. The key question is what are they doing with this data in the long term? Do they understand the materiality of these perils on credit risk and on their customers’ homes, businesses, and lives/livelihoods?
It is essential to define and embed a clear strategy of risk profiling and stress testing. We know this isn’t something that can be done overnight and is a journey.
Climate change is happening so let’s work together to embed this data analysis and improve business and consumer resilience.
Working with a specialist in this field such as D-Risk can provide expert perspective and an understanding of the bigger picture, bringing all the pieces together. Assessing exposure to climate change risk is what we do best using over 100 years of collective experience, geo location expertise and our trusted climate risk portfolio services. We are currently working with lenders to support their financial decision making and analysis in line with the new PRA expectations.
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