Lloyd's advice on the Financial Services Authoritiy's (FSA) Individual Capital Adequacy Standards (ICAS) (500KB, pdf) on the Financial Services Authoritiy's (FSA) Individual Capital Adequacy Standards (ICAS) includes the following guidance on the allowance for climate change.
"Models are based on past experience and it is likely that over time this experience will become out of date due to all manner of trends. When such trends start to emerge, agents should consider their impact on the results. It is not acceptable to wait until the effects of the trend are well understood before commenting on the possible implications....."
"Agents must consider scientific evidence on climate change with regards to parameter setting. The ICA should explain where this has been considered and has resulted in a change of parameters being used. With specific reference to the influence of climate change on US hurricane risk there is currently no consensus amongst catastrophe modelling agencies. However, there is strong evidence that hurricane risk in the North Atlantic is raised above long term averages. If a long baseline view is being utilised, managing agents should consider and assess any additional capital at risk arising from this more optimistic approach in comparison with a near term view. Managing agents should provide commentary to address this specific point....."
"Agents should also take account of the recent industry and meteorological studies into the effects of sea temperature, the current cycle of hurricane development, and possible dependence between one or more hurricanes occurring on similar paths. The ICA should consider scientific evidence on climate change with regards to parameter setting and the ICA should explain clearly where this has been considered and any resulting change in parameters being used."
This guidance will help to ensure that climate change trends are taken into account in capital modelling.
As last year our realistic disaster scenarios (4MB, pdf) have continued to keep pace with demographic trends and our hurricane scenarios now consider a USD 125bn event.
