Institute and Faculty of Actuaries: Climate-Related Stress Tests Welcomed But Greater Clarity Needed

LONDON, England, March 20 -- The Institute and Faculty of Actuaries issued the following statement by President John Taylor:

The Institute and Faculty of Actuaries (IFoA) has submitted its response to the Bank of England consultation on proposals for stress testing the financial stability implications of climate change. In the response, the IFoA recognises the importance of the 2021 Biennial Exploratory Scenario (BES) exercise but recommends that UK insurers will need a more strongly defined framework.

"The BES is the first of this kind and, if carried out in the right way, will help insurers better understand their exposure to climate-related risk. However, the current proposals require participants to interpret and assume a significant amount despite the Bank defining a number of prescribed scenarios. Firms will need to make assumptions on a wide range of issues which could result in big discrepancies in analysis. We want to see a strongly defined framework rather than the use of prescribed scenarios.

"It is unlikely that any firms are currently undertaking climate-modelling to the level proposed and would not have the capacity to do so in the timeframes. The proposals also require gathering a significant amount of data which is not always available or, where available, could be expensive and have limitations. We believe a possible solution would be to focus on full corporate modelling for the largest exposures by risk and to use these as a proxy for similar companies with a similar profile.

"We have asked the Bank to provide clarity around whether reinsurers would be provided for and in particular, whether a primary reinsurer would be covered. The UK reinsurance market is, by its nature, global and we are concerned that the questions in this consultation do not reflect this international understanding.

"In terms of using a 30 June 2020 static balance sheet, we believe the current proposals do not take into account any management actions that may be taken between 5-year reporting points. This does not reflect how the general insurance market works in practice. It is also unclear why a 5-year reporting point has been chosen and we would urge the Bank to consider increasing reporting intervals to 10 years. It is unlikely that much loss of information will result from reducing the number of projections firms are required to submit and it will make the exercise less onerous.

"Finally, we have asked the Bank for clarity as to how it has chosen the selected scenarios. We do not believe the scenarios provide for all possible situations we would expect the Bank would want participants to consider as part of a robust exercise"

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About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial. As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest.

Actuaries provide commercial, financial and prudential advice on the management of a business's assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd's of London.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

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