The UK’s insurance sector lacks “comprehensive and high quality data” it needs to properly evaluate climate risk, the head of the Bank of England’s (BoE’s) insurance division has said.
Speaking at the Association of British Insurers’ (ABI’s) climate summit 2022, Stefan Claus, the head of the BoE’s general insurance division, said insurers are struggling to get hold of sufficient data, as he called on insurers to invest in data gathering processes to plug the information gap.
The BoE chief also warned that “nearly all” insurers rely heavily on third party modelling tools, as he raised concerns that insurers had faced limitations in modelling certain types of catastrophes.
Looking forwards, Claus said that if insurers fail to respond effectively, climate risks are likely to cause a “persistent and material drag” on their profitability, as he warned that such drags would make the financial system as whole “more vulnerable” to other shocks.
The BoE exec said that in a worst-case scenario, the drag on insurers profitability could amount to sums of £1.2bn a year.
He warned that around 7 per cent of UK households could be forced to go without insurance, in a worst-case scenario situation, due to the increased risk of floods.
These risks could however be mitigated, if flood defences and other similar measures are put in place. Insurers also signalled their support for a publicly backed UK flood reinsurance fund, the BoE exec said.
Nonetheless, Claus said any costs to insurers will likely be “much lower” if “early, well-ordered policy action is taken” to limit the effects of climate change.