Understanding Flood Risk
To gain insights into the UK-wide vulnerability to flood risk, the PwC Climate Risk Analytics team conducted an analysis using data from the World Resources Institute and the Office for National Statistics. The analysis revealed that over 90% of UK postcodes have no risk of flooding, even in extreme scenarios. This means that even in years with extreme weather events, these areas and properties are not expected to be flooded. This finding provides some reassurance that the majority of the mortgage stock is not at risk. However, certain areas and postcodes in the UK such as South-East England, East England and South-West Scotland are prone to flooding, albeit with varying frequencies and severities.
Implications for Lenders
The potential increase in flood risk and the interplay with the insurance element poses significant challenges for mortgage lenders. This is because even though there might be a longer term valuation impact for properties in areas prone to flooding, the impacts coming from insurance protection (or better said, lack of) is likely to materialise much sooner. This brings forward the risk and creates uncertainty in the property valuation.
The rejection of mortgage applications for properties in high-flood risk areas is just the beginning and arguably, a simplistic measure. Lenders must now assess the flood risk associated with their current portfolios, down to the postcode level. High-quality data, including satellite imagery, local elevation differences and other specific circumstances are important to appropriately assess the situation of individual properties. This detailed understanding is crucial for effective risk management and requires additional measures to mitigate these risks. Lenders must also set aside appropriate provisions and capital to account for these potential risks.
PwC Climate Risk Impairment Solution (CRIS)
To assist lenders in navigating the complexities of climate risk, PwC offers the Climate Risk Impairment Solution (CRIS). This tech-enabled solution equips lenders with analytical insights designed to address the questions raised by C-suite and Board, such as:
- What are the risks and impacts of climate change on our current stock of mortgages?
- How do you manage and mitigate these risks going forward?
- How should we think and embed climate risks in our lending decisions?
- How do we make sure that we are appropriately covered should these risks materialise?
Climate change materialises via two main transmission channels:
- Physical risk - the impact of increased frequency and severity of physical risk perils on the assets held as collateral. In the UK flood risk is the most prevalent.
- Transition risk - the effects of moving towards a net-zero economy on energy prices, building retrofitting regulation and ultimately on customer affordability.
CRIS assesses the impact of both transition risk and physical risk on the market value of properties, providing valuable insights at both the portfolio and account levels. CRIS is compatible with any existing IFRS 9 Modelling suite and additional data requirements are minimal.
As climate change continues to impact our environment, flood risk becomes an increasingly pressing concern for mortgage lenders. The potential for properties to become uninsurable and ineligible for mortgages creates uncertainty for both borrowers and lenders. By leveraging advanced analytics and solutions like CRIS, lenders can proactively manage and mitigate these risks. It is crucial for lenders to stay ahead of the curve and incorporate climate risk into their risk management frameworks to ensure the long-term sustainability of their portfolios.
If you're interested in learning more about our Climate Risk Impairment Solution (CRIS), please reach out to our experts for a demo or, join our live webinar on 03 July 2024, 9:00 AM. To attend please register your interest.
Together, we can navigate the challenges posed by climate change and secure a resilient future for mortgage lending.
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