News & Opinion

PRA Climate-Risk Expectations

12 December 2025
Ricardo Melo

The Prudential Regulation Authority (PRA) has published PS25/25 and the new SS5/25, replacing SS3/19 in full with effect from 3 December 2025. The new framework aims to strengthen how insurers and banks manage climate-related financial risks, while offering greater clarity and flexibility for Solvency UK firms, mutuals and friendly societies. The policy takes effect immediately.

A major theme of the updated policy for mutuals and friendly societies is proportionality. The PRA emphasises that business model and exposure determine the required level of sophistication.

Smaller firms, including mutuals and friendly societies, may use simpler tools and integrate climate considerations within existing governance, risk management and reporting structures, provided their approach remains robust and well-reasoned.

To support implementation, firms have a six-month internal review period to assess their current position and develop a plan to address any gaps. Importantly, this is not a deadline for full implementation, but firms need to be able to demonstrate that their timetable to address any gaps is both ambitious and achievable. Mutuals can take the time to assess current practices and create realistic plans without immediate operational disruption.

Firms need to appoint an individual at a suitable level of seniority to be responsible for identifying, assessing and managing climate related risk, this could to an existing Senior Management Function. Climate related risk management responsibilities may sit within existing committees and risk structures. Mutuals and friendly societies may continue with current board committees but must demonstrate informed oversight where climate exposures are material.

Firms may integrate climate risks into existing risk registers or use a climate sub-register. The key is clear capture of material risks. Firms are expected to understand, not quantify, data uncertainty. Firms do not need to choose conservative proxies, only appropriate ones, with awareness of limitations. Small insurers and friendly societies may adapt climate-risk identification to existing processes without duplicative documentation.

Scenario analysis expectations have also been relaxed. Narrative scenarios are explicitly acceptable, and firms may choose between reverse stress testing and scenario-based sensitivity analysis based on materiality.

For insurers, the PRA confirms that no separate climate capital charge is required. Climate risks should instead be reflected as risk drivers within existing SCR components, with ORSA playing a central role in assessing longer-term impacts and identifying appropriate management actions.

The PRA explicitly decided not to impose new disclosure rules but emphasised that disclosures should be transparent and reflective of the approach to managing climate related risk. Mutuals can focus on operational risk management rather than new reporting burdens.

Overall, the PRA has taken a pragmatic and proportionate approach, highlighting that, climate-risk governance and management must improve, however the expectations are flexible, scalable and appropriate for non-directive and smaller Solvency UK firms.