The PRA has published Supervisory Statement 5/25 and Policy Statement 25/25 on how banks and insurers should approach climate related risks. These update and replace SS3/19 and PS11/19. The new Supervisory Statement has been effective since 3 December 2025, and the PRA expects firms to carry out a gap review against the updated expectations set out in SS5/25 by 3 June 2026. It applies to all UK (re)insurers and banks, including those within international groups, but not UK branches of third country firms. This note focuses on the implications for (re)insurers. 

In 2019, the PRA was among the first regulators to publish its supervisory expectations on the impact of climate change on the insurance sector in its Policy Statement PS11/19, and has been monitoring and supervising firms against these expectations since January 2022.

Six years on, the PRA has observed that the level of understanding of climate related risks and progress to build risk management capabilities remains uneven.

The introduction of SS5/25 does not seek to rewrite the playbook, but clearly shifts its approach from setting expectations to requiring concrete steps to be taken by firms to embed climate risk management. The PRA have not prescribed set metrics but expects firms to take a proportionate approach, particularly as international and market standards develop.

Business Strategy

SS3/19 had first set the framework for boards to assess the financial risks from climate change. It was high level, non-prescriptive and encouraged boards to understand and oversee climate risks. The PRA considers that the climate-related risks analysis that had been provided to boards to-date was not sufficiently specific or targeted to enable them to make business decisions that properly factors the impact of climate-related risks.

Therefore, SS5/25 now requires boards to clearly set and periodically review their business strategy, risk appetite and risk management practices in relation to climate-specific risks. Where material risks are identified, boards are now expected to review the firm's business strategy under a range of climate scenarios. Such scenarios should identify the financial impact of climate events on the firm, including on future revenue, operation costs and profit, and potential trigger points for strategic change.

Risk Management

The PRA observed that firms faced challenges in understanding and agreeing which climate-related metrics they should be using and how they can meaningfully inform decisions on business strategy. As such, SS5/25 now requires a risk appetite hierarchy to be developed that sets (i) the firm-wide risk appetite at the board level; (ii) business line risk appetites reflecting material risks identified for each business line; and (iii) appetite and tolerance levels for outsourcing and third-party arrangements.

Firms are already required to have a robust framework to identify, measure, monitor, manage and report risks. Now, material climate-related risks must be recorded in a risk register which includes the quantitative risk appetite metrics and limits for each risk identified. Sufficient detail of methodologies, underlying assumptions, data and proxies, and associated governance framework, to allow effective change are expected to be provided and firms are encouraged to consider climate risk as a cross-cutting risk. A proportionate approach should be taken which is commensurate to the nature, scale and complexity of the firm's business model, and insurers should exercise judgement with regard to expectations relevant to ORSAs. 

The PRA has also set specific requirements with respect to:

• Operational resilience: Firms must assess and manage risks to operational resilience arising from climate-related events and have suitable means in place to assess whether their operational resilience (assessed in line with the principles set out in SS21/21- Operational resilience: Impact tolerances for important business services) may be negatively impacted by changes in physical climate-related risk.
• Third party data providers: Building on its expectations on SS3/19, the PRA expects firms to understand the risks arising from relationships with clients, counterparties, investees and policyholders. Firms may continue to engage with third-party data providers, but where material gaps persist, firms are expected to consider alternative approaches, including direct engagement with such counterparties or policyholders.
• Litigation risk: Climate-related litigation risk has also become increasingly complex. The PRA has observed that international standard setters differ in their approach to reflecting litigation risk. The International Association of Insurance Supervisors (IAIS) treats litigation risk as a distinct transmission channel, whilst the Financial Stability Board (FSB) adopts a pluralistic approach, recognising that litigation risk can both be a subset and can materialise independently. Given the evolving and varied nature, the PRA expects firms to apply their judgement as to whether litigation risk is reflected as a distinct transmission channel of its own, or a subset of physical and/or transition risk, in a way that reflects the firm’s business and risk profile, and which promotes consistency in how the firm identifies and assesses such risk. Insurers should therefore consider litigation and reputational risks stemming from climate commitments, wider engagement on climate change and also from historical underwriting activities.

Climate Scenario Analysis

Climate scenario analysis (CSA) has been a key risk identification tool for assessing financial risks since the publication of SS3/19. Under SS5/25, it is now expected to become a core governance and risk management tool which can help firms inform business strategy and shape its risk appetite. As such, the PRA expects CSA to:

• have clear objectives, with the rationale for the range of selected scenarios to be clearly defined and agreed by the board;
• capture all material climate-related risks that are relevant to the firm's business model and CSA capabilities should be matched with the potential impact of climate change on the business model;
• have use cases that are matched to scenarios, time horizons, frequency and balance sheet assumptions;
• have distinct exercises for each objective; and
• be proportionate to firms' level of exposure and size, and should be able to justify the selection of sources relied on. Larger firms with material risk exposures are expected to require more mathematically sophisticated methods of assessment.

When developing climate scenarios, the PRA encourages firms to also consider the role of national or international climate change commitments, such as emission reduction targets. IAIS guidance goes further and highlights the need to consider market conduct, such as greenwashing.

Data and Disclosures

There is an emphasis on robust, standardised climate-related data. Firms must now identify significant data gaps on an ongoing basis, and have contingency solutions using appropriate proxies, and assumptions where reliable or comparable data are not available.

Systems should be put in place to collect and aggregate climate-related risk data as part of firms' overall data governance and IT infrastructure, with processes to ensure that the aggregated data are accurate and reliable.

No substantive changes have been made to the expectations on disclosures, and firms should continue to meet existing general disclosure requirements and engage with wider initiatives on climate-related risk disclosures, including UK Sustainability Reporting Standards.

Insurance-specific issues

SS5/25 includes specific expectations for insurers. These expectations do not go beyond existing PRA rules and expectations, but seeks to provide additional guidance on the following areas:

• Financial losses: In addition to a general expectation for firms to consider appropriate time horizons for impact analysis, insurers are also expected to assess the potential for financial losses on contracts of insurance they have underwritten, or expect to underwrite over the next 12 months, including the potential for losses to develop on the Technical Provisions.
• Asset and liability management: Climate related risks should be considered on both sides of the balance sheet as well as their interrelationships. Where insurers have existing risk appetites that are subject to climate-related risks, the impact of such climate risks should be included in the risk modelling. The EU Prudent Person Principle under Solvency II requires insurers to "take into account the potential long-term impact of their investment strategy and decisions on sustainability factors". SS5/25 goes further, whereby insurers are now also expected to diversify their assets to avoid excessive accumulation of risk in the investment portfolio.
• ORSAs: Insurers must develop processes to consider the impact on capital levels of reasonably foreseeable adverse scenarios (including material climate-related risks) in their capital management plans and as part of the ORSA. As part of the Stress and Scenario Testing component of their ORSAs, insurers should continue to include CSA. Insurers must also consider the climate-related reputational risks arising from their investment and underwriting strategies, their historical underwriting activities as well as from their wider engagement on climate change and the transition to net zero in conducting the ORSA.
• SCR calculation: Insurers using an Internal Model (IM) should consider the impact of climate change on the underwriting, reserving, market, credit and operational risk components of the IM. Insurers using the Standard Formula (SF) must also assess whether the impact of claim-related risks leads to a change in their assessment of whether the SF calculation remains appropriate for their risk profile.

What insurers should do now

The PRA will start requesting evidence of internal reviews from mid-2026, so insurers should start reviewing their current positions against the updated expectations set out in SS5/25 and develop a plan to address any identified gaps. In particular, firms should review their governance structures and identify an individual to be responsible after overseeing the management of climate-related risks. 

Internal frameworks and procedures should also be reviewed to ensure firms have adequate information to allow it to implement processes and procedures required to meet the new expectations