Enhancing insurers’ approaches to managing climate-related risks under PRA SS5/25
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The Prudential Regulation Authority (PRA) has published Supervisory Statement SS5/25, updating and replacing its 2019 climate expectations (SS3/19).
SS5/25 responds to feedback from consultation CP10/25 and aims to provide greater clarity and detail on what firms should do to manage the effects of climate change, reflecting international standards and developments since 2019.
What does this mean in practice?
- Supervisory expectations are clearer and more detailed, and the PRA will expect firms to evidence how climate risk is embedded in decision-making.
- Greater focus on consistency across the balance sheet (underwriting, investments, counterparties, policyholders) and on scenario limitations (non-linearities, tipping points).
- For insurers, climate-related risks should be reflected in the SCR where material, supported by clear governance and justification.
This article summarises the key elements of the Supervisory Statement and highlights what it means in practice for insurers.
At a glance
Governance
The PRA expects boards and senior management to take clear ownership of climate-related risks and to ensure these risks are effectively managed within the firm’s overall business strategy and risk appetite.
In particular, when determining business strategy and the delivery of climate goals, firms should consider the relevance to their business model of national climate policies, including (where applicable) the UK Government’s target to bring the net UK carbon account to zero or lower by 2050.
The PRA expects firms to:
- define and assign clear responsibilities for climate-related risks at board and executive level.
- review the firm's business strategy under a range of climate scenarios to assess the financial impact of material climate risks.
- integrate climate-related risks into the firm’s risk appetite framework, including through the identification of material risks, metrics and limits.
This may require firms to move beyond treating climate risk solely within sustainability or ESG processes, and to ensure it is embedded within core governance and decision-making frameworks.
Boards should have an active role in managing climate change risk. They need to evidence how climate-related risks influence strategy and risk appetite in practice, supported by timely information and effective challenge. Supervisors are likely to focus on whether governance arrangements are operating effectively, not just whether policies and structures exist.
Jessica Snowball Senior Consultant
Risk management
SS5/25 sets out detailed expectations for how firms should identify, assess, measure and manage climate-related risks within their existing risk management frameworks.
The PRA expects firms to:
regularly identify and assess material climate-related risks to the resilience of their business model over relevant time horizons, including through the use of forward-looking tools where appropriate.
- assess climate-related risks through clearly defined transmission channels, link them to existing financial and operational risk types, and capture all material risks within the firm’s risk register.
- develop consistent risk assessments across material relationships with clients, counterparties, investees and policyholders, supported by common assessment structures, materiality criteria and documentation.
- use quantitative approaches to monitor material exposures, including proxies and expert judgement where data or models are limited, ensuring key assumptions and uncertainties are appropriately governed and challenged.
The PRA also expects firms to translate identified material risks into metrics, limits and monitoring arrangements, aligned to their risk appetite, with regular reporting to the board and relevant committees.
Fragmented approaches, for example, differing assessments between underwriting and investments, will be increasingly difficult to justify. Firms should be able to articulate a coherent view of their climate risk exposures including how materiality judgements are made, how risks are monitored against appetite, and how outcomes are used in decision-making where data or models are imperfect.
Lara Palmer Senior Consultant
Climate scenario analysis
SS5/25 sets out expectations for the use of climate scenario analysis (CSA) as a core tool to identify, assess and manage climate-related risks, recognising that firms cannot rely on historical data alone.
The PRA expects firms to:
- use CSA with clearly defined objectives, proportionate to the materiality of the exposures, and to match the sophistication of their approaches to the scale and nature of those risks.
- understand, document and be able to explain the design, assumptions and limitations of the scenarios and models they use, including the extent to which they capture material risks.
- recognise that climate scenarios may not capture the full range and scale of risks, including non-linearities and potential tipping points, and account for these limitations when interpreting results.
- consider cross-border spillovers of climate impacts, for example through supply chains or reduced global demand.
- consider whether a reverse stress-tests should be conducted as an additional component of CSA.
The PRA expects CSA to inform business strategy, risk management, risk appetite and capital assessments (including the ORSA for insurers), even where outputs are uncertain, judgemental or primarily narrative-based.
Scenario analysis should not be treated as a compliance exercise or limited to regulatory stress testing. Firms should be able to explain how scenario results (and their limitations) are used in practice to inform strategy, risk appetite, underwriting, investment and capital considerations, supported by appropriate governance and documentation.
Charl Cronje Partner
Data
The PRA recognises that data and model uncertainty is an integral part of managing climate-related risks, and that data gaps and limitations will persist for some time, particularly for longer-term and transition-related risks.
However, SS5/25 reinforces that firms are expected to identify material data gaps on an ongoing basis and to take proportionate and progressive steps to manage and remedy them over time.
The PRA expects firms to:
- understand the most material data gaps and weaknesses, and how these affect risk assessment and decision-making.
- use proxies, approximations and expert judgement where reliable data are not available, and to document and be able to communicate the rationale for their use.
- maintain and implement credible plans to improve data quality and coverage over time, including through investment in capabilities, appropriate use of external data sources, and engagement with clients, counterparties, investees and policyholders.
The PRA will expect firms to demonstrate that data limitations are appropriately governed, challenged and reflected in their risk management, including through effective oversight of third-party data and integration into risk aggregation and reporting processes.
Data limitations are not, in themselves, a justification for inaction. Supervisors will expect firms to demonstrate how decisions are made despite imperfect data, and how improvements are prioritised over time in line with material risk exposure.
Wendy Kriz Evans Principal
Disclosures
SS5/25 reiterates that firms’ existing disclosure obligations extend to material climate-related risks, and that disclosures should enhance transparency on how these risks are managed.
The PRA expects firms to:
- disclose how climate-related risks are integrated into governance and risk management processes, including how materiality has been assessed.
- maintain an approach to disclosure that reflects the characteristics of climate-related risks and evolves in line with firms’ understanding over time.
- consider engagement with relevant industry and regulatory initiatives, and the benefits of greater comparability of climate-related disclosures across firms.
The PRA places particular emphasis on ensuring that disclosures are consistent with firms’ internal governance, risk management and scenario analysis, and that they reflect firms’ current understanding of climate-related risks.
Inconsistencies between disclosures and internal practice present increasing supervisory and reputational risk. Firms should ensure disclosures accurately reflect key judgements, areas of uncertainty and known limitations, and are updated as internal assessments and approaches evolve.
Cat Drummond Partner
Applying SS5/25 specifically to insurers
SS5/25 makes clear that climate-related risks are financial risks for insurers and should be managed through existing underwriting, risk management, capital and valuation frameworks, in line with Solvency II requirements.
The PRA expects insurers to:
- identify, assess and manage material climate-related risks over appropriate time horizons, and to manage exposures within their stated risk appetites.
- reflect the impact of all material climate-related risks within the SCR, including through Internal Models or, where relevant, consideration of the appropriateness of the Standard Formula.
- consider both physical and transition risks (including litigation risks) across underwriting, investments, reserving, asset-liability management and reinsurance.
- apply appropriate judgement in assessing materiality, recognising uncertainty and data limitations, and be able to explain and justify assumptions, methodologies, management actions and outcomes to supervisors.
The PRA does not prescribe a single methodology, but expects climate-related risks to be reflected in a way that is proportionate, coherent and consistent with the insurer’s risk profile, and aligned across risk management, the ORSA and the SCR.
Actions for insurers to consider now
Boards and senior management should consider:
- whether climate-related risks are clearly embedded in underwriting, reinsurance and investment decisions, rather than assessed separately;
- how material climate risks are identified, assessed and reflected in risk appetite, the ORSA and SCR calculations;
- whether climate scenario analysis outputs are being used to inform capital planning, risk appetite and strategy, despite acknowledged limitations;
- whether governance, documentation, management actions and trigger points are sufficiently developed to support supervisory challenge;
- whether external disclosures remain aligned with internal assessments, assumptions and judgements.
SS5/25 raises expectations across strategy, risk and capital, particularly where judgement is required to translate uncertain climate risks into financial impacts.
We help insurers by providing:
- independent reviews of climate governance, risk management and capital approaches
- pragmatic support on climate scenario analysis and SCR integration
- board briefings and regulatory readiness reviews
training for firms on climate change risk
