The Big Question: Can insurers meet the regulator’s expectations on climate risk?

July will see the end of the UK’s Prudential Regulatory Authority’s (PRA) consultation on its updated supervisory expectations for banks and insurers around climate risks.

At the time the consultation was launched the PRA said the proposals would help banks and insurers manage the effects of climate change on their businesses and thereby maintain the essential services they provide to the economy.

Since the PRA first set expectations for firms on climate change in 2019, insurers have begun to build their climate-related risk management capabilities. However, The PRA say progress is uneven and more needs to be done to meet the expectations.

Understanding of climate-related risks and development of leading practice in the effective risk management of these risks is challenging and continues to evolve. Firms have asked the PRA to provide greater clarity on what the PRA expects them to do to manage the effects of climate change.

The regulator explained: “The PRA has observed that banks and insurers have taken concrete and positive steps to improve their capabilities. However, firms’ levels of readiness to manage climate-related risks and embedding vary and the overall assessment of supervisors is that firms need to make further progress.

“For example, the PRA has observed that despite progress in recent years, firms’ understanding of climate-related risk is still developing, with significant uncertainty about the source and magnitude of risks. In addition, tools and capabilities to manage the distinctive characteristics of climate-related risks, such as climate scenario analysis and stress testing, are still being developed.”

In many cases the proposals are simply applying existing regulatory approaches to managing risks (for example, in relation to effective governance), but with greater clarity on how they apply to climate-related risks specifically.

However for insurers the new rules will create the need for a different approach to reporting structures.

Ian Summers, Global Business Leader, AdvantageGo.

Laurence Besemer, CEO of the Forum of Insurance Lawyers (FOIL) says: “A new consultation from the Bank of England’s Prudential Regulation Authority (PRA), is open until 30 July 2025, and sets out proposals on updated supervisory expectations for banks and insurers to manage the effects of climate change on their businesses.

“These signal a significant regulatory shift in how UK insurers and banks must approach climate-related financial risk. While the primary targets of the consultation are insurers and banks, its ripple effects will be deeply felt by the law firms that service these industries – particularly those providing legal services to insurers.

“As the regulatory bar rises, insurers will expect their legal services suppliers to demonstrate credible, operational climate risk policies of their own.”

Besemer continues that insurers will need to fully understand the PRA’s aims for the new regulatory framework.

“The Bank of England’s prudential policy executive director, David Bailey, explained that the aim of this consultation is ‘to set out clear, straightforward and concise expectations about climate-related risk identification, management and governance outcomes that the PRA would like to see from firms’ – with significant knock-on impacts for the law firms that advise them,” he adds. “The new standards proposed seek to set new principles for firms to follow, leaving management to decide what actions make most sense for their particular business. They must take account of lessons learned in the last five years and align the PRA’s approach with international standards for banks and insurers.”

“The biggest change in approach set out in the consultation is a switch to forward-looking scenario planning, rather than risk management based on historical data,” Besemer explains. “Firms will be required to use scenario analysis to inform their decision making and then use their own judgement and risk appetite. There will be a new requirement that climate change risk management will become the responsibility of the board and senior management, as part of core strategy, rather than treated as a stand-alone ESG issue. Firms will also be required to have a formal risk appetite statement, against which to make their judgment calls.”

He concludes insurers and brokers may well need to rely on their legal experts as the regulations demand greater evidence of the steps they are taking to adhere to the rules.

“Insurers will be under pressure to evidence serious climate governance and risk controls, meaning they must look closely at their partners and suppliers, including their law firms, to ensure alignment,” warns Besemer. “As such, due diligence on law firm practices may become routine. Insurers will want evidence of carbon footprint tracking, internal climate risk governance, and employee awareness training. Meanwhile, we can expect tendering pressure to mount. Climate credentials could become a formal part of panel appointment processes or requests for proposals (RFPs).”

Insurers will find that tick-box statements will no longer suffice. Instead, clients will expect substantiated responses on how their legal advisers are addressing climate-related risks – both operationally and in their advice. Adding to the challenge, law firms need to manage their own internal risks while also needing to demonstrate that they can help clients navigate an increasingly complex regulatory environment. This means investing in climate literacy, building advisory capabilities, and ensuring their internal compliance is watertight.

The PRA’s emphasis on strategy integration, board oversight, and scenario planning is about changing how institutions think about long-term value and resilience. Law firms that grasp this will have a genuine edge. This is key, because as insurers and banks face higher expectations on climate risk management, their legal advisers must step up.

Done properly, this new compliance can deliver long-term strategic value. For insurance law firms, this means more than tweaking policies. It demands an integrated, serious approach to climate risk that reflects not just regulatory compliance but strategic foresight.