Question for insurers: Will your internal review of climate risk be done by 3 June 2026?

After 3 June 2026, the new Bank of England PRA Supervisory Statement 5/25 indicates that the PRA will start asking for evidence that insurers have done their review and are moving to align with the PRA’s detailed climate risk expectations.  

Be warned that the review and subsequent alignment could be a big job. 

We reported last December on the introduction of Bank of England PRA Supervisory Statement 5/25 on enhancing banks’ and insurers’ approaches to managing climate-related risks. 

The PRA first set expectations on the management of climate-related risks in 2019 with the introduction of Supervisory Statement 3/19.  However, this is a fast moving and increasingly high-profile area as direct, transitory and liability climate risk starts to bite. Six years on, banks and insurers are being given greater clarity from the PRA on what it expects of the firms that it regulates, and there is rather less room to hide.  

The climate risk journey

In basic terms, the PRA expects banks and insurers to apply a two step process to climate risk as follows:  

• Step 1:  Material climate risk identification, assessment and Board sign off
• Step 2:  Appropriate risk management response 

What hits home about SS 5/25, however, is not the steps themselves but the approach to them that banks and insurers are expected to take, and the internal infrastructure that the PRA expects them to have in place, in order that these steps are properly informed and considered at the proper level.  

In particular, SS 5/25 focuses heavily on the role of the Board and executive management and sets out what it expects to see from them and from the governance system as a whole. The PRA is looking for the following:

• A high-level understanding by the Board of the impacts of climate-related risks on the firm’s business model over various time horizons and under different climate scenarios. 
• Provision by the executive management to the Board and its relevant sub-committees of timely information on the firm’s exposure to and mitigation of material climate-related risks to enable the Board to discuss, challenge and make decisions relating to the firm’s management of these risks and the firm’s climate-related risk strategy.
• Appropriate processes for identifying and assessing the impacts of transition and physical climate risks that can impact their business models over the short, medium and long term to inform the Board’s discussion on risk management and strategy.
• Clearly defined and assigned responsibilities for the Board, relevant sub-committees, and executive management in managing climate-related risks. 
• Assignment by the Board and executive management of individual responsibility at an appropriate level of seniority, to be reflected in the relevant individual’s statement of responsibilities or other relevant appointment terms, including performance and remuneration.
• The playing by that/those individual(s) of a key role in implementing the firm’s strategy in response to climate-related risks and ensuring the Board has the appropriate information to facilitate decision-making. 
• Executive management supporting the Board’s oversight function and being able to demonstrate to the Board how the firm’s business strategy and risk management approach is responding to climate-related risks to its business model.
• Keeping pace with the evolution of knowledge and capabilities relating to the measurement and management of climate-related risks. As collective understanding of climate-related risks, data, tools and best practice evolves, firms are expected to refine and innovate their approach to better integrate climate-related risk management across their organisation.

Other points covered in detail by SS5/25 are:

• The standard of scenario analysis that is expected to support the risk identification and assessment process.
• The data used in risk identification and assessment, how to improve it, and how to respond to any gaps or inadequacies that there may be in the meantime.
• Regulatory disclosures, and how the PRA expects to see approaches in disclosures that are in line with the expectations in SS 5/25.  

Make no mistake, while SS 5/25 stresses that individual companies’ responses can be proportionate, that firms should be able to leverage existing governance structures to satisfy the climate risk governance, and that there are long term benefits to proper approach to climate risk, it poses a significant and ongoing challenge to banks and insurers as a whole in the short term.

Deadlines

The steps required to transition from an approach aimed at satisfying SS3/19 to one that satisfies SS 5/25 is going to vary from insurer to insurer. It could require several layers of change to the way in which individual insurers operate in some cases, and fewer in others. Quite rightly, the supervisory statement does not put a sector wide deadline on achieving full compliance. Rather, it sets a date by which individual insurers have to have made an effective start to getting their houses in order.

That effective start is an internal review of the current status in meeting the updated expectations.  Insurers have to identify the expectations that require further work if they are to be met and develop a plan for how they will address any gaps. This work has to be completed by 3 June 2026.  The PRA will not ask for evidence of these internal reviews until that date has passed but may well do so subsequently.   

Climate-related risks could be a driver of underwriting, reserving, market, credit, liquidity and operational risks faced by insurers as well as reputational and litigation risks. 

If you are a small team within an in-scope organisation, and looking to address the SS5/25 climate risk requirements, then please feel free to book an exploratory, no-obligation, 30-minute chat with us.

At Weightmans, we are experienced in delivering climate risk reviews covering governance and policy aspects of the regulatory requirements, and helping move clients towards regulatory compliance.