By Wan Hsien Heah, Partner and Consultant and Craig Turnbull, Partner and Head of Regulatory Advisory at Barnett Waddingham
Without action, climate change is estimated to cost the UK 3% of its GDP by 2050 and more than 7% by 2100. We also know that the attitude and appetite to invest in climate risk mitigations varies significantly across the globe. It is therefore no surprise that the regulator continues to push firms to face this risk head-on and capture the uncertainty within their risk universe. Regulators worldwide are stepping up oversight, urging firms to better understand, monitor and manage climate-related financial risks.
Current state and the PRA’s proposals
In April 2025, the Prudential Regulatory Authority (PRA) released Consultation Paper CP10/25, outlining proposals for how banks and insurers should mitigate and manage the financial risks associated with climate change.
CP10/15 builds on Supervisory Statement SS3/19, published in April 2019, which first outlined the PRA’s expectations for firms in addressing climate-related risks. The paper responds to uneven progress and calls for greater clarity from firms. It highlights gaps in insurers’ tools, frameworks and capabilities, and is expected to replace SS3/19 following consultation.
The proposals draw on UK and international experience over the past five years, focusing on governance, risk management and scenario analysis. While non-prescriptive and target-free, they set clearer expectations for integrating climate risks into existing frameworks. The PRA also aims to engage with firms to support best practice.
Actions will vary by firm, with a proportionate approach being adopted based on exposure and materiality. All firms must assess their vulnerabilities, but those with greater exposures will be expected to take more robust action.
PRA proposals
The proposals in this consultation paper are intended to strengthen insurers’ ability to mitigate and respond to climate-related risks.
Governance and risk management
In its assessment, the PRA found significant variance in the extent of climate-related risk identification and mitigation across firms. As such, the PRA sets clearer expectations for how firms should embed these risks into their governance and risk management frameworks. Boards are expected to take ownership of climate risk oversight, supported by appropriate training, regular scenario-informed reporting and integration of climate considerations into strategic decision-making.
On risk management, a key focus is implementing a structured and regularly reviewed process for identifying and assessing material climate risks. This includes evaluating exposures from key counterparties, such as clients, policyholders and investees, ensuring these risks are appropriately reflected in firms’ risk registers.
Insurers are also expected to integrate climate-related risks into their operational resilience frameworks and establish robust internal risk reporting systems. In addition, the PRA proposes that insurers develop quantitative metrics for each material climate-related risk. These metrics should be reviewed and updated regularly to ensure they remain relevant and effective in light of evolving climate science, regulatory expectations, and business exposures.
Climate Scenario Analysis and insurance specific issues
Scenario analysis is a powerful risk management tool used by all insurers and the PRA has highlighted the growing importance of Climate Scenario Analysis (CSA) as a strategic risk management tool to account for uncertainty. While some insurers have begun incorporating climate-specific scenarios, the PRA notes that methodologies remain inconsistent and often lack depth.
To address this, the PRA proposes that insurers capture all relevant physical and transition risks with a well-documented and justified range of scenarios. They also encourage integration of CSA into core business processes, including strategy, risk management, valuation, liquidity and capital planning.
Additionally, the PRA set out insurance specific proposals to strengthen how climate-related risks are embedded across insurers’ frameworks. These proposals align with international standards and build on the general expectations:
Risk management: Insurers should embed climate risks into their risk appetite frameworks, both qualitatively and quantitatively, ensuring they reflect impacts on technical provisions and asset exposures.
Scenario analysis and Own Risk and Solvency Assessments: The PRA acknowledges that climate-related risks may unfold over longer and more uncertain time horizons than those typically considered in insurers’ Own Risk and Solvency Assessments (ORSA) processes. Where climate risks are material, ORSAs should include CSA with appropriate time horizons. Insurers should also outline potential investment and underwriting responses, particularly for non-life insurers, and apply reverse stress testing to explore vulnerabilities.
Solvency Capital Requirement (SCR) integration: The PRA expects climate-related risks to be reflected across all relevant SCR components. While no new capital requirements are introduced, the PRA proposes to clarify that the SCR should capture climate impacts on underwriting/reserving, market, credit and operational risks. Balance sheet valuation: Insurers must ensure climate risks are consistently reflected in asset and liability valuations. For firms using the Matching Adjustment, the PRA clarifies expectations around credit assessments and attestations to ensure solvency ratios are not overstated.
Challenges and next steps
The consultation period for CP10/25 concluded at the end of July 2025, after which the finalised supervisory statement will supersede SS3/19. Firms will be expected to begin implementing updated expectations within six months of publication, including providing evidence of internal assessments and plans to integrate climate-related considerations into their risk management frameworks. Given the short implementation window, firms are strongly encouraged to begin preparations early.
Implementing these proposals may pose challenges. Climate risks differ from traditional insurance risks in scope and complexity, with limited data and evolving dynamics complicating scenario analysis. Exposure will vary by firm, depending on business model and underwriting lines.
Some of the key questions insurers face include:
Evolving expectations: While CP10/25 offers more clarity than SS3/19, firms still face uncertainty around the level of detail required when integrating climate risks into governance, strategy and operational resilience. The non-prescriptive nature of the proposals leaves room for interpretation, particularly regarding how the PRA will assess materiality and effective risk identification.
Scenario and risk complexity: Designing climate scenarios remains a major challenge. Firms must incorporate both physical and transition risks, yet the scale, timing and interaction of these risks are highly uncertain. A ‘business-as-usual’ path could lead to severe long-term impacts, while an abrupt transition to net zero may trigger disruptive short-term shocks. Unknown correlations, evolving hazards and limited data further complicate scenario analysis and tail risk modelling.
Metrics and materiality: The PRA expects firms to adopt quantitative metrics for each material climate risk but has not specified which metrics to use or how to define materiality. This leaves firms to develop their own approaches, which may vary widely depending on business model and exposure – potentially leading to inconsistency across the market.
How we can help
The good news is that the PRA is not expecting significant changes to the frameworks and tools that insurers should have in place to deal with climate change. However, it is important these are fit for purpose when it comes to climate change. Our experience of helping firms assess the suitability of their risk framework for longer-term and emerging risks mean that we are well placed to support insurers in establishing risk frameworks, policies and quantitative processes and procedures to ensure that the issues raised by the PRA in CP10/25 are suitably addressed. We can also help assess insurers’ existing processes against the wider market given the evolving and currently divergent practices.
As climate-related risks continue to evolve in scale, complexity and unpredictability, insurers must remain agile and forward looking. The risks of tomorrow will not mirror those of today – the ability to adapt is critical. While the PRA’s proposals present challenges, they also offer a clear opportunity: to build more resilient, informed and future-ready risk management frameworks. The path ahead may be uncertain, but with thoughtful action and collaboration, it is one that can be navigated with confidence.
Melissa Sutjipto, Senior Consulting Actuary, contributed to this article.
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