How location data can help banks and insurers meet climate change stress tests

Climate-related disasters are becoming more common. The Environment Agency has noted that around eight million properties in England (or one in four) could be at risk of flooding by 2050. Understanding the location of assets has become fundamental to risk analysis; for banks and insurers, the question is no longer whether climate risks will materialise, but where and when they will strike hardest.

Financial institutions are increasingly expected to manage climate-related risks. The Bank of England expects UK banks and insurers to use scenario analysis and climate stress testing to manage climate-related risks, and prepare for any potential impact. Banks and insurers must consider where their assets and potential liabilities are, such as mortgaged homes or insured properties, to face climate risks with preparation and confidence.

Understanding the location of assets has become fundamental to risk analysis. Portfolios that appear diversified at the regional level may in fact be concentrated to a smaller area vulnerable to climate risk. For instance, one postcode area can cover a huge area (over 6,000 square miles in Inverness, Scotland) meaning that it cannot be used as a generalisation for potential risks, such as flooding.

Ordnance Survey (OS) location data can help identify where assets are located at the property level, to ensure the same climate risks in any size of area can be identified, assessed, and the risk adequately managed.

Smoothing out the ‘spikes’

UK insurer Hiscox, which offers tailored policies to affluent customers, faced an issue with ‘spiky exposures’ – where assets near one another can lead to multiple potential losses from the same incident.

Using OS’s authoritative location data, Hiscox geocoded the location of its insured properties to provide an accurate picture of the potential risk to each. OS data included in the OS National Geographic Database (NGD), provides comprehensive, accurate, large-scale geospatial data attribution. With the NGD, insurers have the ability to access addressing data, detailed structural information including heights and footprints of buildings, elevation, building outline, number of floors, basement presence, and construction materials. It also provides crucial context about surrounding environments like schools or industrial sites.

These insights helped Hiscox to put aside the right level of reserves, ensuring it could provide the most competitive premiums to its customers.

Maximising the data available

OS data also includes information on rivers and lakes, essential for flood risk assessment. It enables banks and insurers to map the exact location and extent of waterways near properties, so they can in turn determine any potential risks. This data feeds into comprehensive flood models developed by organisations like the Environment Agency, which combine OS data with meteorological data, historical flood records, and terrain analysis, to predict flood zones and assess risk levels across different areas.

Some insurers may also choose to create their own flood models, applying their own risk algorithms and claims history data, to create more tailored assessments.

An OS Partner can help banks or insurers make sense of the huge volumes of data required to improve their understanding of climate risk.

The future of financial resilience

Knowing if assets and liabilities are heavily clustered in a high-risk zone is crucial for both retail banks and insurers, enabling proactive risk management, such as adjusting lending criteria or updating insurance coverage. Integrating location data into stress tests and risk assessments helps financial institutions build resilience, protecting themselves and customers from the growing impacts of climate change.

As climate risks intensify and regulatory requirements evolve, successful institutions will be those that accurately assess and manage location-specific risks. The Bank of England's stress test marks the beginning of an era where financial institutions must demonstrate confidence in navigating a future shaped by climate change.

With OS data, insurers and retail banks can be confident in the reliability and accuracy of climate risk assessments, leading to better decision-making and in the longer-term, improved customer satisfaction.

Find out more about how OS data can help you make decisions with confidence by visiting our insurance support page, where you can get in touch with the OS team to find the best Partner for you.