The transition to a low-carbon economy could inflict "huge" losses on insurers, as a result of potential shifts in asset prices, Mark Carney, governor of the Bank of England, has said.
In a speech to the insurance market Lloyd's of London, Carney warned policymakers' efforts to stop global warming threaten to render about one-third of fossil fuel reserves 'stranded', causing the prices of securities and stocks of fossil fuel companies to plunge.
"The exposure of UK investors, including insurance companies, to these [price] shifts is potentially huge," Carney said, before noting that one in five of the FTSE 100 companies are in the natural resource and extraction sectors.
Carney, who is also the chairman of the Financial Stability Board, ruled out amending the capital rules to penalise insurers investing in high-carbon assets, arguing this is not the role of prudential regulation.
But he promised to increase the transparency of information about the carbon intensity of assets to inform investors' decisions and advised insurers to stress test their positions.
The blunt warning echoed the conclusions of Prudential Regulation Authority's (PRA) report on the impact of climate change on the insurance sector, published on 29 September.
In addition to the risks posed by the transition to a low-carbon economy, regulators have identified other vulnerabilities that could affect insurers as a result of climate change.
According to some estimates, modelled losses from weather-related catastrophes may be underestimated by as much as 50%. Furthermore, insurers may be forced to take account of a much lower level of diversification relief, given evidence of increasing correlation between catastrophes.
In the longer term, insurers could be exposed to liability claims. These would arise if the parties that suffer loss or damage from the effects of climate change seek compensation from insured carbon emitters.
People:Mark Carney