Forward-looking regulators consider not just the here and now, but emerging vulnerabilities and their impact on business models. That is why the PRA has worked with regulated firms, many of them represented here tonight, to produce for the Department for Environment, Food and Rural Affairs a review – published today – into the impact of climate change on British insurers. The Report concludes that insurers stand exposed to each of the three types of risk climate change poses to finance; and while the sector is well-placed to respond in the near-term you  4  BIS central bankers’ speeches  should not assume your ability to manage risks today means the future is secure. Longer term risks could have severe impacts on you and your policyholders. The insurance response to climate change It stands to reason that general insurers are the most directly exposed to such losses. Potential increases in the frequency or severity of extreme weather events driven by climate change could mean longer and stronger heat waves; the intensification of droughts; and a greater number of severe storms. Despite winter 2014 being England’s wettest since the time of King George III; forecasts suggest we can expect at least a further 10% increase in rainfall during future winters. 14 A prospect guaranteed to dampen the spirits and shoes of those who equate climate change with global warming. While the attribution of increases in claims to specific factors is complex, the direct costs of climate change are already affecting insurers’ underwriting strategies and accounts.

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.