Climate risk management in 21st century Aircraft and Airport Insurance

 Barry Moss, Managing Director, Avocet Risk Management and Member of the PACE Advisory Board

 Eduardo Mariz, Senior Analyst and Sustainability Lead, Ishka SAVi

Climate-related risk is reshaping the foundations of risk management and mitigation, and nowhere is this more visible than in aviation insurance, a broad market covering anything from aircraft hull and liability insurance to airport property, credit risk and business interruption insurance. For underwriters, climate-related risk is becoming one of the main forces that will decide what remains insurable, at what price, and for how long.​ Today, as climate events grow more frequent, more severe, and less predictable, the foundational premise of insurance – that the future will broadly mirror the past – is steadily dissolving.

In its place, insurers will be expected to conduct forward-looking, granular risk assessments, as outlined in the recently released Supervisory Statement 5/25 (SS5/25) by the Bank of England through its prudential regulator, the Prudential Regulatory Authority (PRA). The PRA sets supervisory expectations for some of the world’s largest banks and insurers – including participants in Lloyd’s of London aviation insurance market.

This report examines the obligations placed on firms under SS5/25 and the categories of climate-related risk that aviation underwriters, in particular, will increasingly be required to identify, model, and manage. It also lists immediate actions that impacted firms must take before 3rd June.

Prudential Supervision and the Underwriter’s Mandate

Climate change is creating a paradigm shift in accumulated risk that has caught the attention of financial regulators. Recently, James Talbot, Executive Director at the Bank of England, emphasised that climate risk should be seen as a financial risk firmly within the core toolkit of prudential supervision – the Bank’s oversight framework for ensuring the safety and resilience of financial institutions.

His remarks reinforced that climate scenarios are decision tools, not academic exercises, and should inform insurance underwriting appetite and capital allocation across industry sectors including aviation.​ Financial supervisors expect firms – from banks to asset managers and insurers – to move beyond qualitative narratives to more quantitative, consistent treatment of climate risk over time driven and underpinned by independent data. Increasing international convergence sees insurers with global aviation portfolios needing climate‑risk capabilities that are credible across multiple jurisdictions.​

Rethinking aviation risks

The aviation industry operates at the mercy of the atmosphere, and while historically underwriters assumed that weather, while unpredictable day-to-day, was statistically stable over decades, climate change has broken that assumption. Natural catastrophes are altering the frequency, severity, and correlation of hazards, and annual global insured losses across all sectors of the economy have consistently been in excess of $100 billion in recent years. This isn't a string of bad luck; it is a structural shift to a higher "normal" level of loss. For aviation underwriters, climate change risk could drive up the cost of reinsurance and capital, so the question is how to embed it into day‑to‑day risk analysis, selection, pricing and portfolio management.

In December 2025, the Bank of England’s Prudential Regulation Authority (PRA) released Supervisory Statement 5/25 (SS5/25), creating an Underwriter's Mandate on managing climate-related risks. Aviation insurers can no longer treat climate change as "future" problems and, by June 3^rd 2026, must demonstrate that these risks (physical, transition, and systemic – more on these below) are built into governance, risk management, scenario analysis, capital planning and disclosures.​

The goal is to move from simply paying for damage (indemnity) to helping the industry build the resilience needed to fly safely in a more volatile century. Boards must understand how climate risk affects underwriting portfolios, including aviation aggregates, accumulation and correlations with other lines. Insurers must integrate climate considerations into their own risk and solvency assessments (ORSA), including aviation‑specific scenarios. Pricing should reflect forward‑looking climate risk, rather than relying solely on historical loss experience.​

PRA compliance reporting obligations concerning insurers’ Scope 3 portfolio risks (i.e. indirect emissions and climate exposures arising from insured assets and counterparties) will initially be on a ‘Report or Explain” basis, but this is only applicable where there is a lack of reliable data. Aviation is one sector where a considerable amount of data is currently available, such as accurate carbon emissions data, either directly from aircraft operators or through accredited third-party software systems such as PACE*.

* One of the largest London market aviation insurers is to report its Scope 3 portfolio emissions under SS5/25 using independent PACE data, setting a market precedent for other aviation insurers that are regulated by the PRA to report. PACE, Fexco’s sustainability data and analytics division, is a strategic partner of Ishka Airfinance Global.

Climate’s triple threat through an aviation lens

The three considerations in the triple threat are Physical Risk, Transition Risk and Systemic Risk. To capture their full magnitude, we must look beyond the hangar doors and airport terminals to how climate change is fundamentally altering the environment, including the atmosphere in which aircraft operate.

1. Physical Risk - the new atmospheric reality

Physical risk is the most immediate risk, manifesting as increased volatility for flying aircraft.

• Invisible Danger – Clear Air Turbulence: One of the most significant impacts on flying aircraft is the rise in clear air turbulence (CAT) occurring as the climate warms, with temperature gradients in the upper atmosphere shifting, strengthening jet streams and increasing wind shear. For flight crews, this means a higher frequency of sudden, severe turbulence events that are difficult to detect with radar, leading to increased risk of passenger injury and structural airframe stress. Singapore Airlines Flight 321 in May 2024 is a recent example where severe turbulence over Myanmar caused one passenger’s death and injured 144 others.
• More lightning strikes: A warmer atmosphere increases lightning energy primarily because it fuels more violent, intense thunderstorms through higher humidity and enhanced atmospheric instability. As temperatures rise, the air can hold more water vapour (roughly 7% more for every 1°C of warming), which provides more fuel for rising air currents, creating stronger convective storms. According to Airbus, an in-service aircraft will be struck by lightning on average once a year. Maintenance and replacement of parts because of lightning strikes can range from $6,730 to as high as $20 million, according to independent research by Japanese aviation weather solutions provider MTI.
• The Power of Intensified Hurricanes: Climate change is driving a shift toward more intense and frequent rapidly intensifying Category 4 and 5 storms, including occurrences in areas where hurricanes never occurred previously. For underwriters, this doesn't just mean planes on the ground through significant airspace closures, or severe damage to aircraft and passengers, but it can mean the rerouting of entire transcontinental corridors affecting the commercial viability of routes and operators. This is a particular challenge amid existing geopolitical airspace restrictions, recently exacerbated in the Middle East.
• Wildfire Smoke: The increasing frequency of drought-induced wildfires creates massive smoke plumes that can mimic the effects of volcanic ash clouds. These particles pose a severe threat to jet engines, causing abrasion and potential flame-outs. Large-scale wildfires can ground entire regions and force aircraft to take lengthy, fuel-heavy detours.
• Hot and High Performance: Extreme heat on the ground directly translates to risk in the sky. Thinner air at high temperatures reduces engine thrust and wing lift. This forces aircraft to carry lighter loads or use longer runways, and in extreme cases, it can lead to aborted take-offs or incidents during the initial climb phase when lift is most critical. Operationally, it also reduces the aircraft revenue payload due to the need to carry more fuel, and, in some instances, it can lead to flight cancellations. Phoenix, Arizona, in the summer of 2017 is one example, when temperatures as high as 48C resulted in cancelled flights operated by Bombardier CRJ regional jets.
• Geographic exposure of Airport locations: Traditionally, many airports have been located on coasts due to flatness of ground and proximity to major cities. Climate change sees increasing exposure to flooding, storm surge and rising sea levels, events which can shut down runways, damage critical systems and trigger large business interruption claims. The storm surge caused by Typhoon Jebi at Kansai International Airport in Japan in 2018 is a notable example, leading to the airport’s closure for two days before a partial reopening.

2. Transition Risk - the cost of a clean sky

Transition risk centres on the global effort to re-price carbon and shift toward a low-carbon economy. This creates a "License to Operate" challenge for the aviation industry.

• The Repricing of Fleets: Today, the lack of physical aircraft to meet passenger demand over the next 5 years means that residual values for aircraft are currently (and likely to remain) high. For insurers in the medium term, transition risk is something to consider on the airlines’ balance sheets. Should carbon taxes rise sharply, then older, more fuel-thirsty aircraft may lose their value sooner than balance sheet depreciation curves, creating the risk of stranded assets.
• Credit Risk: The cost associated with “the polluter pays” principle is increasing the risk of airline insolvency.  The convergence between the phase out of free allowances under the UK and EU Emissions Trading Systems and the additional cost of CORSIA offsetting compliance is creating additional credit risks for airlines that can often run into multi-millions of dollars annually (the bankruptcies of low-cost carriers Flyr, WOW and PLAY were both compounded by outstanding ETS liabilities).  Those airlines that operate more efficient aircraft and fleets incur lower compliance costs and benefit from a strategic advantage.  Airlines operating in the EU and UK will be required, as early as April 2027, to publish their emissions on a comparative basis, enabling consumers to make flight booking decisions based on carbon emissions.  Passenger selection creates a cross-cutting exposure between transition risk and reputational risk.
• Directors and Officers Liability (D&O): places an obligation on those involved to consider if an airline’s board is being honest about their decarbonization path, and if they are adequately preparing for the physical risks of climate change in aviation, as outlined above. We are seeing a new wave of greenwashing and climate failure litigation, all of which affects risk management for the underwriter.
• Liability‑side: In addition to D&O, professional indemnity and product liability can also be affected by climate litigation and evolving standards, and claims may centre not just in the area of emissions but also on failure to manage foreseeable physical risks, such as a hub Airport failing on flood planning.​
• Risk of new technologies: A key example is the SAF Evolution, where Underwriters must now evaluate the risk profiles of these new technologies. While supporting these innovations is essential for aviation’s sustainability, they bring new and untested risks into the underwriting fold.

3. Systemic Risk - cascading shocks across the network

Systemic Risk in a highly networked industry such as aviation can be triggered by a single disruption, known as a "contagion effect”.

• Supply Chain Contagion: Global supply chains for spare parts are highly concentrated, so a climate disaster in a manufacturing hub could delay maintenance for fleets globally, leading to grounded aircraft and Contingent Business Interruption (CBI) claims that strain an insurer's capital.

• Correlated Airspace Closures: An example of a single "mega-event", such as a massive smoke plume, can close large swathes of airspace simultaneously, potentially triggering Business Interruption (BI) claims across multiple carriers and regions and breaking the underwriting assumption that risks are independent.

• Economic Volatility: A climate shock can drive inflation and economic instability, and in the case of aviation, a sudden drop in passenger demand triggers increased credit risk for airlines, effectively turning a weather event into a solvency crisis.

 

From Assessment to Action: Next Steps for the Future-Ready Insurer

Under SS5/25, Scope 3 emissions—specifically "financed" and "insured" emissions—serve as a critical data layer for identifying and managing transition risk. While the supervisory statement focuses on prudential risk management rather than being a standalone disclosure rule, it explicitly aligns with broader standards that increasingly mandate Scope 3 reporting.

The role of Scope 3 emissions in SS5/25 is defined by several key areas:

• Metric for Transition Risk Transmission: The PRA identifies transition risk as the financial risk arising from the shift to a low-carbon economy. For financial firms, this risk is primarily transmitted through the emissions profiles of their clients and policyholders (Scope 3). High-emission portfolios are susceptible to asset repricing, stranded assets, and increased credit risk as carbon prices rise and regulations tighten.
• Materiality and Data Granularity: Under SS5/25, firms must perform board-endorsed materiality assessments of their climate exposures. The PRA is pushing firms toward more granular, "decision-useful" information, including sector-level decarbonisation metrics and borrower-level transition plans to meaningfully inform underwriting and credit assessments.
• Alignment with Disclosure Standards: The Disclosures chapter of SS5/25 (Section 4.80–4.84) acknowledges the shift from TCFD to UK Sustainability Reporting Standards (SRS), which are based on ISSB (IFRS S2) publications. The finalised version of the UK SRS was released on 25^th February 2026 and endorsed on a voluntary basis, but the UK government plans to consult on whether to require private companies to follow them. These international standards explicitly include requirements for Scope 3 emissions reporting, meaning firms will increasingly need this data to meet the "consistent and comparable" disclosure expectations referenced in SS5/25.
• Support for Transition Plans: If a firm adopts specific climate targets (such as Net Zero goals), SS5/25 requires the board to demonstrate how the plan to meet these targets—which necessarily involves reducing financed or insured Scope 3 emissions—is integrated into the firm's overall business strategy.

A Shift from Awareness to Evidence

The transition from the previous SS3/19 to the new SS5/25 marks a shift from narrative-based awareness to evidence-based implementation. Insurers and banks are no longer expected just to disclose they have "emissions risk"; they must now demonstrate how these metrics flow into their financial risk models and future scenarios.

Next Steps for SS5/25 Compliance

To align with the Prudential Regulation Authority’s (PRA) updated expectations under SS5/25, banks and insurers must transition from the broad principles of the previous framework (SS3/19) toward a deeply embedded, evidence-based approach to climate risk. While the PRA allows for proportionality, the immediate priority for all firms is to initiate a formal internal review of their current climate risk status.

Immediate Actions Required by June 3, 2026:

1. Identify Gaps: Firms must evaluate their current processes against the detailed expectations of SS5/25 to identify areas requiring further development.
2. Develop a Remediation Plan: A concrete plan must be created to address any identified gaps in governance, data, or scenario analysis.
3. Document Evidence: Although the PRA will not request evidence until after June 3, 2026, firms must complete this internal review and have their plans ready for potential supervisory scrutiny by that date.

Ongoing Strategic Requirements:

• Board Accountability: Boards must move beyond high-level awareness to a deep understanding of climate impacts across various time horizons and scenarios. They must assign clear, individual responsibilities for managing climate risks, often reflected in performance and remuneration terms.
• Risk Management Integration: Firms must apply a two-step process: first, identifying and assessing material risks with Board sign-off, and second, implementing an appropriate risk management response.
• Data and Innovation: Firms are expected to proactively address data inadequacies and continuously refine their measurement tools as collective industry knowledge evolves.
  • One of the trickiest, yet most vital, parts of this new roadmap is getting a handle on Scope 3 emissions—specifically the "insured" or "financed" emissions. Under the lens of SS5/25, these aren't just numbers for a sustainability report; they are a critical layer of data for understanding Transition Risk.

This is more than a "tick-box" exercise; it requires identifying specific gaps in data, governance, and scenario analysis and establishing a credible, time-bound plan to address them. Boards must move beyond passive awareness to active sign-off on material risk assessments, ensuring that accountability is clearly assigned at the senior executive level. As the PRA will begin requesting evidence of these reviews immediately following the June deadline, the period between now and then is a vital window for insurers to "get their houses in order" and prove that climate resilience is truly embedded in their business-as-usual operations.

Underwriting the century we’re actually in

Climate-related risk is rewriting the rules that aviation underwriters have relied on for decades. The past is becoming a less reliable guide, which means traditional pricing, reinsurance and capital models need to evolve to capture higher volatility, clustering of events and the potential for abrupt shifts.​ Ultimately, the sustainability of aviation as a business model will depend not only on carbon innovations but on whether it can remain insurable under a changing climate.

Tags: Asset managers, Banking, Insurance, UK