National Resilience Committee

Thursday 18th June 2026

(began 2 months ago)

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10:02
None Portrait Speaker 1
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We're on. Morning. And thank you for coming to help us with our important inquiry into national resilience. I should remind you that this is a public session. It's being broadcast live. Um, and and there will be a transcript sent to both of you within the next couple of days. So if there are any minor inaccuracies that you need to correct, that'll be your opportunity to do so. And when you've had a look at the transcript, if anything occurs to you that is not there that you wish you had said at the time, please feel free to send us.

Supplementary, um, comments or evidence in in writing. That would be excellent. And Professor Lang, we've already had written evidence from you, of course, for which many thanks. So. And that is already registered in the public domain. So um you don't need to repeat what you've already told us there, but this is a good opportunity for you to enlarge on that. And obviously we've got a lot of questions for both of you. Um, when you, um, we've, we'll each ask some questions.

And when you give your first answer, perhaps you could each just introduce yourself very briefly. So we've got that on the record as well. Um and I will kick off if that's okay. Thank you. Um, so could I ask to start with, to sort of set the scene?We've heard evidence, for example, that the vulnerability of our undersea cables being cut could have a pretty immediate effect on food supply chains. So how should we be working internationally as well?You think are.

At the moment, resilient to large scale risks?Um, particularly the impact of international disruptions, um, that affect food security. We've heard evidence, for example, that the vulnerability of our undersea cables being cut could have a pretty immediate effect on food supply chains. So how should we be working internationally as well as domestically to build and maintain and improve resilience on food security?To start, professor Lang?Yeah.
10:05
None Portrait Speaker 2
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My name is Tim Lang. I'm professor emeritus of food policy, the center for Food Policy, city, Saint George's, University of London. It's a very long title and. You very much for inviting me and and Minette Batters. Um, to what extent are supply chains resilient. Well, it depends which risks. Which foods. All of those. So to unpack that, um, in. In my very large report for the National Preparedness Commission, the just in case report came out last year.

Um, I spelt out or we spelt out about 15 different risks. Some are very big, like you're talking, you know, cables being cut and some are um less, but longer term, some are affect public directly, some affect different bits of supply chains. The public is been made aware most recently obviously of things like fertilisers. The enormous underpinning of the entire food system by oil and the oil and gas industries. But in my report, which took evidence a bit like you, it was partly modelled on select committees, although the hearings and interviews that we did for just in case report were anonymized.

I wanted to talk to insiders. So they were really frank. The key issues that emerged were choke points. The Chatham House report ten years ago identified at least 15 for the food system oil, gas, energy costs, ransomware, malware, not just cutting of cables, disruption to concentrated supply chains. If you have a very few number of big firms dominating supply, if they're affected in any way, the knock ons can be enormous. So the risks can be very, very disparate.

It's one of the things that makes resilience such a complicated issue to address in food. It requires you to disaggregate the individual risks and then to put them back together, because some of them come in combinations and some amplify and you get loops, uh, and, um, you know, what the academics call poly crises, then having societal impacts. So to go into it just a little bit more, I mean, some of the key ones that we're now aware of, uh, and that my report already flagged was the.

The reliance, for example, on carbon dioxide throughout the food system. Uh, if you talk to people in food manufacturing or retailing or even back to the fertiliser, CO2. Effects almost everything very quickly. Uh, if there was a strategic, um, break in that the knock on effects would be very quick indeed. There are also some, if you pan back 80 years since World War two, lock ins to fertilizers, artificial fertilizers, as we call them, NPK, nitrogen, nitrogen phosphate and potashes um, those are.

The building blocks of quote unquote, normal food supply chains. If you look at another angle into the risks, uh, large scale risks, we have to start unpicking different pathways of impacts. All of these shocks to the food system could have different impacts on different sectors. And no one really, apart from me opening the issue up has looked at that seriously. And one of the big recommendations of the National Preparedness Commission report was, we've got to get going and doing the analysis.

Why did I say that with such confidence?Because other countries are doing it and Britain has not been doing it. The good news is Defra for England now does have a resilience unit, and I'm very glad about that. And it's growing. The number of people it's employing, it's advertising for jobs at the moment. The head of it told me last week. There are some things that are beyond Defra. A key risk, uh, that came out in Covid was what if a new pandemic hit the food workforce?Do we have an understanding of where the strategic risks of particular industries and particular workforces lie?The answer is no.

And I spelled that out in chapter five of my report. If you want to look at that. And then there are some very, very sort of hard military conflict type risks and threats. Uh, that even some of my friends and colleagues thought I was being a catastrophist raising, which is that 94.5% of all British retail food comes from nine companies. 95.4% out of nine companies. Those nine companies have precisely 131 distribution hubs. If you think of drone warfare that we've seen going in Ukraine, you see how those become a very, very quick strategic risk.

Again, that's spelt out. So to summarize. And sorry, this is a long answer, but it kind of opens up the whole picture. The problem with food is it goes into everything and it relies upon everything. And everyone assumes they'll have it. Uh, and yet it's all on a just in time system of delivery. There's no storage or very, very little storage. We can perhaps come to that. And that's why a major recommendation of my report, which I flagged in my submission to you, Baroness Cousins, was that we must start engaging with the public to be grown up about this and not take the attitude that many of my interviewees said they really feared, which is that we patronise the public by thinking we mustn't frighten them.

We'll only encourage panic. We don't need to do it like that. Other countries show a better way.
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10:11
None Portrait Speaker 3
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Yes, very briefly. Well, thank you for having me in today. And I'm sure you have seen the Farm Profitability review, but if not, I would like to resubmit it to you because I think it bears a lot of relevance to this committee. Um. Look, I think we've learnt a lot about our international supply chains, about our relationship with Europe. Most of the 40% of food that we import does still come from Europe. And that is probably unlikely to change as our closest trading partner.

However, I think we have seen the cracks in in our food system very clearly in the last few years. And I would remind this committee of the billion less eggs that were produced in 2023 due to the rise of the price of wholesale gas, the rise of energy, effectively, that meant that the cost of production contracts that those egg producers had with their packers and retailers weren't fit for purpose. They stopped producing overnight. We saw in the same period in 2023, rationing of salads from Morocco again, weather events in Morocco causing that shortage of salads that we were totally reliant on at certain times of year.

We are completely reliant on importing salads. And if you remember. Uh, Baroness Coffey actually gave the turnip more credence than it's probably ever had by suggesting that the. country could eat them. But it's a real sign of the times that we face and the need to become much more resilient here. And I'd also remind this committee of the challenge in Covid, when people were panic buying loo rolls, there was never, ever a shortage of loo roles. But when you have 70 million people on an island and they start to panic, buy, you very soon create a shortage.

So we've seen the mentality when it's tested, we've seen what happens. And if that plays out with the food system and the national, uh, just in time distribution network, that really doesn't have more than ten cans of baked beans spare in it at any one point in time. You can see what would happen. And that, I think, paves the way for the need for immediate change.
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10:14
None Portrait Speaker 2
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Well, Anthony so colleague who helped me on the just in case report, and I've just written a new briefing paper for the National Preparedness Commission on that. And we outlined at least four options. You can either try and get off the treadmill, in other words, remove, you know, go organic or go biological circular economy, recycle the phosphates rather than keep on getting them in from rather suspect or risky sources. Um, but a fundamental issue is in the short term, there is huge reliance on, on those artificial fertilisers.

Uh, and it's the issue that Baroness batters just alluded to. Where locked in still to European sources of supply in this case para European in the form of Norway. Uh, so there is a very big strategic problem there, which is a political issue that has to be resolved. Um, for, for appearing to, on to this committee. I was looking at the Swiss. Uh, Switzerland has a strategic reserve. It's unusual in rich countries. It has three months of food supply of major stocks.

And I can send you information about that if you like. And indeed, I was in touch with the Swiss government to find out the latest, because there's been a debate about whether they should move from three months storage to 12 month storage of food and fertilisers. But there is in fact, I literally was looking at it outside here. They just sent me the information this morning overnight. Um there is. Three months National fertiliser stocks held by Switzerland. So.

But that requires money. It requires funding for the total food system for Switzerland. Hundred and 80 firms have contracts. So it's funded by the state. But then comes into the price of food. The price of food goes up in Sweden because of that strategic stock. People used to laugh and economists didn't like Switzerland for doing this. You know, just let market forces run. But now no one's laughing at Switzerland.

So the question you ask is ultimately, when you people. Well, actually, the House of Commons has to decide what do we want?And if we don't want to have strategic stocks of fertilisers, what are the other routes that we can go?There are very good arguments for going more biological, but that's not a quick fix. It takes time to go organic, takes time to build a new sewage system to collect the phosphates, for example. These are big, big issues that you can't deal with in the short term.

But our long term, and you can deal with them in the long term.
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10:18
None Portrait Speaker 4
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Yeah.
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None Portrait Speaker 1
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Okay.
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10:20
None Portrait Speaker 2
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Well, we can both address that. I'll go first because my report was heavily about just what you've asked. I mean, the just in time system is brilliant. It's got rid of storage. The storage is it depends on the commodities two, three days, sometimes four days, sometimes almost none. The, the, the food system is moving all the time, uh, from point of production. Um, one of the things my report recommended was that we really do need to put the government's own resilience framework principles into action.

They're not applied to the food system. We need a whole. The three principles are whole of society approach. Prevention is better than the cure. And get a shared understanding of what the risks are. We haven't done that in food yet. It's kind of coming. Your your your inquiry, I think is going to be a very big contribution to that. I think there are things that industry can do in the transition from just in time to just in case, you know, after my report, some big retailers said we could do more storage.

Well, they've spent 70, 60 years getting rid of storage. Okay, maybe they are quite important in that. But other countries say, no, we need strategic stocks as well. There's a mindset that I think needs to change in Britain. Britain constantly thinks and it's the imperial past actually thinks that other people will feed it. Why?Why do we make that assumption?Why do we assume we can afford it?You know, others don't do that even when they're very, very affluent countries.

Sweden, Switzerland, should the UK create stockpiles?And my answer is yes, we should. At the moment, all we've got is as a government website called the Prepare website, I've actually been quite critical of that as it's too limited, but I'm constantly reminded, and I think it's right to be reminded. So I'm reminding you it's good that we've got something rather than nothing. But to ask the British public to store few bottles of water and few days of food is not dealing with the strategic risks to a food system.
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10:24
None Portrait Speaker 2
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Probably not. No, no.
10:24
None Portrait Speaker 7
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So stockpiles of what?
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10:25
None Portrait Speaker 3
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You'll see in my review that I, what I found very stark was my review is for England only. But I obviously spoke to Scotland and to Wales and to Northern Ireland. I found in the devolved nations they had much closer relationships on a whole supply chain basis. They knew who was in those supply chains, and they knew exactly how much food was in those supply chains. That does not apply to England at all. So England relies on being Great Britain, and it doesn't have the same knowledge of its supply chains.

So I recommended setting up agri growth hubs in every region, uh, to set. Up farmer resilience groups in every catchment, 93 catchments in the country to work with those agri growth hubs very much to create a much closer relationship with local authorities, with district councils. That is probably at the worst state it has ever been in. We do not have those relationships at a local level, so we need more. We need to know what raw ingredients we're growing in the first instance, what we need to be growing more of, what local processing we've got, and we've got some diamond projects.

So I would say the Lincolnshire Food Partnership is one where they are supplying the local school, the local hospital. They know their supply chains that really wants to be happening across the whole country. But at the moment you don't even have the dialogue. And I worry at the moment everything is being focused on the mayoral districts. That is fine, but what we are doing is we are creating more diamonds and leaving the white space. You can't afford to leave white space.

You have to fill the gaps. So this is as much I'm not talking about funding in particular. This is about setting up relationships and structures so that these relationships can build and build in resilience.
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10:28
None Portrait Speaker 3
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Um, but look, it is absolutely right that you raise this question because I think probably since the last financial crash back in 2009, we have taken a very relaxed attitude to food. Indeed, the scientific line has been, we're a wealthy nation. We can afford to import our food. Um, you've got massive reports like Sir John Eddington's Foresight report that was written at that time of that moment that predicted the perfect storm of 2030. I asked the question when I was president of the NFU, is that work still being looked at in Defra?Not one single person remembered it.

And this is the problem. You have to have a comprehensive plan that goes across Whitehall that, of course, is focused on education, is focused on the farmers of the future, those that are going to work in the supply chain. I would say that understanding how your food is produced when you waste more food than any other country in Europe, the obesity crisis that we face is also important. Um, but you come back to the problem of lack of plan. So we left the European Union in 2020.

We've had a change of secretary of state every year. And so you've had no consistency. And in the last Parliament, the approach was we'll leave the market to run food and we will focus the resource on public monies for public goods to invest in environmental delivery. We need a radical reset of that approach. Everybody I have spoken to in the press leading this review is the environment reporter. Emma Reynolds is the environment secretary of state. So you don't have in Defra the commercial expertise and acumen that is needed right now.

So at the cabinet table, both in the last Parliament, the previous Parliament and in this Parliament, food is not at the heart of Whitehall. It is not represented. So at the moment we are leaving Tesco's to run the show. They do a very good job. But what if. And now we have to prepare for the what if and you have to bring the food expertise into this. So Emma Reynolds, at the very least should become the Secretary of State for Food and Environment.

So she has the right civil service support to make the decisions that are made. It is not just one thing of focusing on fertiliser or anything else. You have to look at a plan and we haven't had a plan for farming or food ever since we left. Indeed, we didn't have it prior to that because we left that to the European Union. So there are some big things coming, like the farming roadmap meant to be published in June, but we really do need to see change now.
10:31
None Portrait Speaker 1
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Thank you. Yes.
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10:33
None Portrait Speaker 4
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Thank you.
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10:33
None Portrait Speaker 2
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Nanette and I would completely agree. It is folly to allow production to decline. There is a big debate in my world about how much would be good strategically, what sort of level of self-reliance or self production would be. It depends. On what?On pineapples. You don't expect Britain to produce them. Uh, but on grains on on dairy produce, you know, there needs to be a bit of strategic thinking. It's back to Lord Speller's, uh, putting me.

On the spot. One of the things my report did was say, if we want to advise about stockpiling, whether it's for households or the national level, we have a scientific body which is designed to do that. Second, the Scientific Advisory Committee on Nutrition, I recommended it hasn't happened, but I've recommended it. So I recommend it to you that we ask that body to say, what do we need as a basic, uh, ingredients for. The national diet and whether it's at the domestic level, in product terms or at the strategic stockpiling level that informs public policy making the way to do.

We don't do that. Switzerland gives every citizen of Switzerland a calculator. It can go online. You can calculate how many people in your house, what do they eat?How are they?And they'll say, this is what?How long do you want to have a storage for?You know, it's very consumerist, but at least they're helping people to engage in their own protection. We're not doing it at any level. And I would agree, all the questions are asking aren't things that can be resolved by the central state or by domestics.

It's a multilevel challenge that's got to be addressed. We're not doing that at the moment.
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10:36
None Portrait Speaker 2
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No, not.
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None Portrait Speaker 8
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If gold.
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None Portrait Speaker 1
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Lady Northover.
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None Portrait Speaker 2
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Well, I spent a lot of time in my report process research process, talking to at risk groups. And the good news was that everyone I spoke to, whether they were top people in very big and powerful companies, or whether they were people working in a small district in north east of England or very poor areas. Everyone got it. That the people on low incomes are really canaries in the in the mine. Um, what can we do?Well, it requires money.

It requires a lot more thinking that sticking plaster like food banks is sticking plaster. When I interviewed food banks and talked to the whole of that sort of movement, they said they don't want to be doing this anymore. Could those become local community food stores?Well, that's an interesting idea that was proposed. So I just recommended we need to explore that. Could that happen?Could it could could they be developed?There's a whole movement, a new movement of social supermarkets trying to do low cost food for at risk populations.

There is quite a lot of practical experience in the food and poverty world, and low income of talking about going beyond sticking plaster, but ultimately becomes a matter of money. More equal societies like Sweden, uh, look after all of their populations. Britain is a very unequal society. And therefore we have this very big problem of people on low incomes. But that's. This building has witnessed many debates since it was built about these issues. Thank you.

But resilience is one way of looking at it. And again, it's back to Lord Spillers question. To me, it's one of the reasons I recommended we are Sacn Scientific Advisory Committee on Nutrition to look at stockpiling, to look at storage, to look at different social groups within that. Germany, for example, gives different advice for different dietary choices that people have. We could be much more flexible than we are.
10:45
None Portrait Speaker 1
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Add to that, yes.
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None Portrait Speaker 5
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I would say you have different tribes in different departments that are counterproductive, with the aim that is trying to be achieved. So you have raw ingredients in Defra, you have processing and manufacturing in DBT. And what I've put in my review is how you bring them together. On planning, we could solve a lot of these issues if we freed up planning. Defra retains the bureaucracy and the process of planning. Mhclg deals with planning and doesn't deal with the process.

So I could go on and on. But you get the problem. Whitehall does not function for a functioning food system. End of. So you have to bring it together with a plan of how we are going to do this. Now, actually, I was quite encouraged doing this review. That is quite straightforward to do, but it does require leadership. And when you change your secretary of state, you know, virtually on a monthly basis, they never get their feet under the table to make the decisions that are needed.

So I've talked to the Prime Minister several times. This is at that level, unless the Prime Minister and the Chancellor are prepared to make the changes that are needed now to address this problem, nothing will change because the tribes are set up within the civil service for how it's going to operate. I'd like to add, you know, I have completely reformed my views of the civil service, having worked in Defra with a small group of civil servants tasked and directed with the right information. My team were excellent, absolutely excellent.

So I'm not being critical of the civil service, but the national and overarching plan has failed, is failing now, and it needs to be amended as fast as possible. And actually that is quite straightforward to do. We've done it with energy, and we should do exactly the same with food.
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None Portrait Speaker 5
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You're absolutely right. And thank you for raising it because in the last Parliament, it was decided that actually we should be paying farmers to grow environmental crops and not food producing crops. We are in the last year of that, but there are many, many hectares across the country that are growing environmental crops for the last three years, got rid of their staff, got rid of their machinery and are feeding a very healthy crop of pigeons and rooks. Sorry to sound a little bit facetious about it, but it is not of today's world.

It really isn't. So what I recommend is bringing in protein crops. We should be growing peas, beans. There is a public good, a soil benefit from that. We should be growing. Oilseeds and pulses ourselves here. There is a public good benefit from that. So you've got to look at and you've got to work on a whole supply chain basis. Because the worst thing that happens in agriculture or horticulture is you produce too much, you flood the market, you lower your price.

So you've got to have a plan for what you're doing. But the point I made on the today programme yesterday was that actually a farm can deliver on nearly all of government priorities for what's needed. So if we freed up permitted development rights beyond 1000m², we could extend our poultry buildings. At the moment we are importing more poultry meat because we've restricted what our farmers can do. And the planning process is so bureaucratic, bureaucratic, it takes years. So what you want with the ideal farm is to be able to have on farm reservoirs, on farm green energy, ideally more on rooftops rather than on agricultural land, but also to have the ability to put in wind turbines on farms so that communities can benefit from affordable energy.

The really important link that is getting missed between Desna's, Defra and DBT is that raw ingredients and primary processing must be treated in the same plan. So I can think of a very good dairy processor in the south west that has got £60 million worth of cheese stocks wanting to double the size of that business, exporting to 160 countries, exporting green gas to the local town because they are obviously using our milk and processing it here. Imagine if that could be done across the country that we are producing more of our green energy from our farms, storing more of our water, treating farms as businesses.

At the moment, that's not happening because the Department of Business and Trade isn't worried whether their British raw ingredients or from anywhere else in the world. Why that matters is we want to keep more money in a UK economy. So the plan for growth in rural areas that I document in this review speaks to all the questions that have been raised today. And that is about jobs, that is about wealth creation, and it is about the huge wider benefits that farms can offer that go beyond food, that make this country resilient.

We have a massive plan for building houses. We have no plan for the timber of how we're going to put roofs on those houses, and farming can deliver on all of that. If you bring a cross-government plan in order to deliver it.
11:01
None Portrait Speaker 1
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Thank you.
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None Portrait Speaker 7
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Very good way to end.
11:01
None Portrait Speaker 1
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Yes.
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None Portrait Speaker 11
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Thank you very much.
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None Portrait Speaker 11
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Thanks for having us.
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None Portrait Speaker 12
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Thank you very much and good morning everyone. So I'm Nicola Ranger, I'm a professor in practice at the London School of Economics, and I specialise in issues around resilience, particularly for climate, extreme weather and environmental degradation. So I work extensively with financial institutions and central banks and others around the world. So, um, so I'll sort of answer your question specifically from a climate and environmental perspective, which is my own area of expertise. So. The, the environment is changing much, much more rapidly than anyone expected.

So, you know, I started my career actually as a scientist working in Treasury on the Stern Review on the economics of climate change. And when we look back to what we were predicting then 20 years ago now versus now, things have changed much, much more rapidly. And so we've already seen, for example, some of the worst harvests on record in previous years in the UK. Um, we've seen very significant changes in our environment, changes in soil quality, changes in water quality, water availability, the recent climate change risk assessment, the fourth version of that that was issued last month, shows that within the next few decades, water demand is going to exceed water supplies.

It wasn't something that we really worried about so much in the UK in the past, but it is very clear in the CRA flood risk increasing, uh, increasing risks of drought. So many, many changes. And what we're seeing really is a compounding of different risks that the private sector is facing. So not just seeing changes in extreme weather and changes in the environment, but also then that's compounding with other shocks that we're seeing around the world and the Strait of Hormuz crisis, for example, impacting on global supply chains, global energy costs, all of these things are coming together.

And we see that firms are struggling with this, and many firms can deal with a single hazard. But seeing them all happening at the same time is not something that they're used to seeing. And what we hear from financial, the financial sector and from corporates. So I'd say I agree with your statement that, um, resilience is no longer seen as a nice to have. I think resilience was always seen as essential, but certainly a recognition that just relying on the past is no longer a good guide to the current level of risks and the need to think much more about using the science and using data to really understand those risks.

And look not just at a sort of operational resilience perspective. So it's not just about business continuity, but particularly looking at supply chains, looking at how insurance prices are going to change. For example, prices of inputs. So very, very different. And certainly, I would say even in the last two years, a very significant uptick in firms and their awareness of these issues. So, for example, I've been part of the Bank of England's Climate Financial Risk Forum for about four years now, which is a forum that the Bank of England established to support firms to prepare for climate risks.

And just in the last couple of years, the the an adaptation working group has been established and is, I think, one of the the the most well attended working groups that there is. So there's probably 40 financial institutions that are part of that group actively engaging every couple of weeks looking at these issues. So there's a really significant uptake. But I would say that while there's an increase in awareness, what we're hearing from firms is that they're struggling in terms of understanding the risks and how to respond to those.

And they're struggling in terms of knowing what's coming and having the regulatory guidance on how to respond to that, and also struggling in terms of turning the understanding of risks into actually changes in business practices, increase investment in in adaptation, for example.
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None Portrait Speaker 11
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Thank you.
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None Portrait Speaker 1
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Mr. Gray.
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None Portrait Speaker 13
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Thank you very much. Um, I just introduce myself. I'm an insurance underwriter by background. I've done that for more than 35 years, the past 27 of which I've been a reinsurer. So an insurer of insurance companies. And my background is mainly in catastrophic risks, natural perils like earthquakes, windstorms, hurricanes, but also in addition to that, man made risks like terrorism and conflagration that comes through mostly insurance companies, but also a mixture of state and private, private and public partnership pools that exist around the world.

To address these issues. Um, my focus has generally been on property, but I've overseen teams that write aviation, business, marine, energy, agriculture, trade, credit, and also mortgage. And I joined Paul Re, which we may get on to at some point during the course of this morning. Um, I join Paul re three and a half years ago, I think, uh, being an insurer by nature, risk is something that, um, I spent a lot of time thinking about and my colleagues in the industry certainly do what we deal in, um, is what we're used to.

And it's what we are trained to, to assess and to price and to try and handle. Um, it may sound, forgive me if this sounds rather obvious, but riskier times lead to an increased volatility in terms of the price of that risk and the level of appetite that insurance companies and reinsurance companies have to engage in that risk, which has implications for affordability. Um, and there's no doubt we will come on to, I suspect, SMEs during the course of this, um, this session. Um, but it's ultimately in the interests, I think, of the UK economy that we have a really stable insurance sector that's well regulated, that's well protected, that doesn't take on undue risk.

And that's where I think the intersection between what the private sector can deliver and what it can do in, in association with government becomes extremely interesting. I think, with turning to your specific question about our customers, our customers need there's certainly, I would argue, a heightened interest in protection, um, a need to be protected against ever increasing and complex risks that are out there. And the, the, the aggregation of those risks as they come together. We've got excellent. New legislation coming through in terms of Martyn's law, not yet currently delivered, but that will help on the terrorism side of things and the protection of it.

I think just a final point really on SMEs. I think they understand all about the risks that are out there. I think the challenge that they face is that they've got so much to do, not very much time to, to to dedicate to addressing some of these. And obviously, from a financial point of view, you know, do we just have the bandwidth to, to process?What do I need to do to make myself safe?
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None Portrait Speaker 11
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Thank you, Lord peach.
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None Portrait Speaker 9
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Thank you.
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None Portrait Speaker 12
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Yes. Thank you. So, um. My, my own view. So there's, there's a number of views on the capital adequacy requirements. My, my own view is that actually the framework is sound. Um, but how it's being supplied, how it's being applied, um, could be looked at. So, so what we hear from firms is that while they, they are beginning at the early stages to assess physical climate risks, for example, they're. They're not necessarily feeding directly into, um, how, the way that they're calculating capital at the moment because it's too early.

Um, and there's a lot of uncertainties around physical climate risk. Now there are risks obviously inherent in that. So, so if these the capital requirements on firms are not reflecting the risks that they're actually exposed to, then there's an exposure in the financial system that is not being properly addressed. So I think there's a gap there between the regulatory framework and how it's being applied. And I would say that the guidance that's being provided by, um, supervisors at the moment, what we hear from firms is it's not giving them adequate guidance to be able to do that.

So we hear that. So the guidance is, is um, written in a way that allows them to have scope in how they interpret it, which, you know, there is merit to that because different firms are very different. So there needs to be some scope. However, what we hear and what we've seen, for example, in the seabeds, the climate stress tests that the Bank of England ran a couple of years ago is that firms are there's so much openness that actually there's not enough guidance on what they should actually be doing.

And what we hear from some is that they would like to see more specifics. So exactly what types of physical risks should they be thinking about?Because there's no guidance at the moment on should we just be looking at floods?Should we be looking at supply chain risks?And that lack of guidance is preventing them at the moment from acting. So that's one thing that we hear from firms. So so I'd say that from my own view, it's not the framework.

It's it's the guidance that's being provided on how to implement that in practice. And on your point about the, um, supply. Adequacy. So one thing that we've heard from firms is that under the current capital adequacy requirements, they're not able to be rewarded for investments that they're making in resilience in general, be it on the supply side or for example, if they're investing in more resilient infrastructure, for example, and investment in a more resilient, um, road or bridge, it would not be treated in any really different way than if it's not resilient to climate because of the way that it's worded at the moment.

And this is certainly one of the things that we hear from some financial institutions is an ask to the regulators to allow them to reflect resilience of their investments within how they're looking at calculating capital.
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None Portrait Speaker 13
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And I wondered if I might share. Just say a few words about Paul Re for those of you for whom Paul Re is something that you may have heard of, but not be ultimately that familiar with. So we're a public private partnership. We're an industry owned mutual. We have 114 UK domiciled insurance companies that are effectively own Puri, but we're also backed by an unlimited loan facility from HMT. And um, as was pointed out, we were set up in the aftermath of a shift in tactics by the IRA in 1992.

Some of you will remember where you were on that particular day, because the day after the general election in 1992, when a very large bomb went off in the City of London, and ultimately that led to a failure in the reinsurance market, because never before had we seen losses come together at that kind of level. Reinsurers withdrew their support for terrorism as a peril within the property policies. Insurers, in turn, said, we're not prepared to offer terrorism to people who owned buildings. And quite quickly, as you can see, that becomes a very big political issue.

And banks got involved as well because they were loaning literally millions of pounds to people who were at risk of ruin. So Paul Re was set up in 1990, late 1992, before we were even incorporated. The IRA returned in April of 1993. Um, and the £100 million that the members were going to share amongst themselves as the as their excess point had been completely exhausted. Um, and the Treasury were already £140 million down the drain. So the point of developing a pool was obviously needed.

And the way that the system worked for the next 33 years or has worked thereafter, is that essentially members are paying premiums for risks. Um, anybody the whole premise of the scheme was that affordable available terrorism cover would be there for anyone who had a UK commercial property policy. It's been a tremendous success. The government has gone from being minus of the taxpayer, has gone from being -£140, million pounds to £13.2 billion, away from the loss today. Since 2015, when our financial arrangements with the Treasury changed, we've paid more than £2.4 billion into mm.

Uh, and in the last year alone, a quarter of £1 billion. So essentially the government really worked with the industry and has done a tremendous job of monetizing the risk that was out there. And the risk you could always argue, was going to end up on their plate at the end of the day. So understandably, we're, um, keen to get that on the record chair to answer the, to answer the question. Um yes, of course the risk has changed. You know, that doesn't mean that big spectacular bombs and events couldn't happen.

Um, I'm sure there are many terrorist groups out there who would love to be able to do that. The security services obviously work extremely hard and make it very, very difficult for that to happen. Hence the low sophistication, um, nature of terrorism that we see. And Paul recently declared for the first time or Treasury certified for the first time, a loss under the pool re scheme only a month ago with the fire bombing of the synagogue in North London. It is still happening.

But that gives you an indication. It's very much low level. We've adapted over time and changed our product, particularly created something called non damage business interruption in the in the light of the London Bridge attacks, where a number of traders in Borough Market didn't suffer any physical damage, but they couldn't get on to their site and they couldn't trade. And as a consequence, there was a significant loss of SMEs involved. Problems there. The Treasury have been very helpful.

Um, the point I was making previously was extremely helpful in the, the conversations that we've had around the definition of terrorism. I think at this point in time, the Treasury position, as I understand it, is fairly clear that they're not looking to expand the risk and the remit of Paul re at this stage. So Cyber Re which has been mooted quite a lot in various circles, for example, is not on the list of things that they're looking to add, I believe, to to what we're doing. Um and at the end of the day, we're also a member mutual.

So we have to any, any changes to our business model is something that we would be discussing with our members as well.
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None Portrait Speaker 1
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Okay, Lord Farmer.
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None Portrait Speaker 15
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Thank you.
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None Portrait Speaker 12
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Thank you sir. Try to keep some some brief points. But um so so firstly on industry. So what we see is again the financial sector does is doing a lot in this space. If you look at the banks like Barclays, Lloyds, NatWest, they're actually doing a lot to engage with their clients, including SMEs on these issues. And they're very keen to support clients in building their resilience. So there's a lot happening there. I think what we hear though, from from corporates and financial institutions is they're not getting enough guidance from government.

And in particular, there are very limited resilience standards. So they now apply to infrastructure. But beyond that, there's not even a sense there's not a sense of what does good look like in this space. So having clear guidance from government is something we explicitly hear referenced. Um, that can be guidance. It could be regulatory standards. Regulatory standards are particularly useful. Um, so we see that in evidence, for example, in the water sector, we see in evidence that that's mobilized a lot of investment into resilience.

So those regulatory standards, I think the role of insurance is, is really is key. Obviously sister to policy would be flood re, which has been extremely helpful in terms of providing insurance to households that otherwise wouldn't be able to get insurance, but it only covers a certain number of properties. It doesn't cover SMEs. And I think in a growing risk environment, the government is going to have to look at how to work more with the insurance industry to maintain insurability. And the Bank of England itself has identified this as a significant risk around the withdrawal of insurance, and that has knock on effects for whole economy financial stability if insurance is withdrawn.

So I think there is a need for action there. I think the other thing we hear from um government again, is how. How to support firms. For example, we have a national wealth fund, which is investing a lot in mitigation related investments. It's not doing anything on adaptation. So why, why don't we have some sort of equivalent support facilities to support our firms, to be adapting to climate change?So, so there's a number of gaps. If you look at the architecture that supports firms, there's a number of ways that they're falling through at the moment.

And just a final one, if I may, is around, um, again on our sort of civil contingencies, critical national infrastructure, more this area again, it covers particular types of firms quite well. But again, anything related to the food sector, critical minerals, anything sort of beyond the sort of security um cyber finance is very poorly covered at the moment in terms of guidance to firms. So I think we're looking again at that that architecture, should we say that protects the UK economy and which firms are falling through and how to fill those gaps.

I think is essential.
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None Portrait Speaker 13
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Yes, very good question. Thank you very much for that. Um, and as we've already touched on, I think cyber, the cyber element, um, is, is, is certainly something that's been growing in. People's understanding and knowledge in the past few years. Uh, the private insurance market decided to break cyber out of, um, the. General essentially created a new product line called cyber. And that's quite right. The accumulations that were possible were too large to be managed under a normal property policy.

And that's why they went down that route. I think we should all be proud of the fact that the London market is recognised as a global centre of excellence and innovation in the cyber space. Um, and, you know, I'm very proud of the London insurance market from that point of view. I think the challenge that we've got is that, quite rightly, because they're operating in a regulated space, there are two very large exclusions that sit in the cyber policies that are bought. And obviously, lots of people are not even buying cyber policy because they don't understand it.

And it's not being marketed very well. And brokers are not very keen to sell things that they don't fully understand. Um, but we're essentially excluding cyber warfare and damage to critical national infrastructure. And if I go back to the point I made about SM policies previously, you know, when you're an SME and you have a loss, you pick up the telephone to your insurance company and you expect to be paid, you don't expect to have a long conversation about, well, you didn't buy this and you didn't buy that.

And, and thereafter at the moment, cyber warfare, critical national infrastructure, they will not be paid out really under any policy for anybody of any size at this point in time, very, very, very small amounts are available. So that, I think is a real challenge that our sector, um, is. Looking to partner with the government with. Because if you think about it, there are systemic issues that are simply too big for a, an industry with a finite capital base to engage with. And I think that's definitely the Abi have given you a written response to your call for evidence, um, and have made some good points in there about the work that's been done on that.

I would certainly echo that in terms of this is not the real issues that are out there cannot be solved by the by the insurance industry alone. It is a joint effort that we need to work on together.
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None Portrait Speaker 1
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Thank you.
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None Portrait Speaker 6
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Thank you.
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None Portrait Speaker 13
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Well, I think the insurance industry can be, to answer your question, a, a really effective partner with government in solving some of these really difficult risks that are hard to insure. And obviously, we've heard both Paul and Flood re being mentioned here. Two good examples. Two, two different risks, two different approaches to solving that risk at this point in time. And I think those public and private partnerships can indeed, they don't need to be temporary. They could become a permanent feature of the risk management landscape that we have, um, provided that they're well designed, provided that they're dynamic.

I think the important point is that it should be crowding in the private market, not replacing the private market. And, um, you know, I think both Puri and Flood Re have given good examples that £13.2 billion I've told you about has is private money that's been crowded into solving that risk. Done is, you know, in what shape and form that looks like, I think is for others to decide, um, you heard from, from, from an earlier person giving evidence, Baroness batters earlier on about coordination across government.

I think that will be a challenge if you want to set up multiple effectively reinsurance companies dotted around, um, dotted around Whitehall, you know, making sure that they're all working together. Um, and then asking the obvious question of, well, why are you replicating, um, management structures and systems and all the rest of it. Um, but I think it's a really good question to pose and certainly one that should be carried forward.
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None Portrait Speaker 6
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Thank you.
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None Portrait Speaker 3
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Thank you. Perhaps I'll answer the first part first and just briefly go through some of the key elements of financial sector preparedness. Um the other sectors can learn from and see a number of those practices were particularly strengthened after the 2008 financial crisis. So some of the key elements are one is requirements around stress testing and scenario analysis. So so all financial institutions in the UK are required, and particularly banks required to conduct regular stress testing and scenario analysis against any material financial risks.

Um and given that the evidence is very clear that both climate and also environmental degradation represent material financial risks that should be in there. And there are very, very clear supervisory expectations on firms, particularly around climate related risks that were recently updated last year. So so there is a clear expectation set by the Bank of England on firms to conduct um analysis of particularly climate related risks. There isn't, as I mentioned before, a lot of clarity within there on what time scale they should look at, what types of scenarios they should look at.

So that's creating a challenge. Some of the other sort of key areas of um. So particularly for what are called systemically important financial institutions. So either national ones, but also particularly global, institutions. So for example, at a global level. Um, global, globally, significantly important banks of which are the sort of too big to fail banks of which in the UK are HSBC, Standard Chartered and Barclays. They have additional requirements set by them, which are sort of coordinated globally.

So additional requirements to hold additional capital, which reflects the fact that basically if if something happened to that bank, it would have wider contagion effects on the whole economy and potentially the whole global financial system. So they have additional requirements around, um, scenario analysis and capital adequate allocations. There are also requirements around disclosures that you'll be aware of. So financial institutions above a certain size, as well as all corporates above a certain size are required to disclose information on the climate related risks that they face.

And the, the sort of level of practice in that is certainly variable across, um, across different types of corporates. They it's still relatively new, as I mentioned. What they're not necessarily required to do is do anything about it. So they're required to disclose what, what they are doing and that what risks they face, but not to actually act on, on that. And so those are some of the key elements. There's also issues around sort of particular operational resilience rules on banks, their suppliers that also support that.

And so coming to your second part of the question about then what's missing. So frankly, so I would say the UK until around 18. Months to two years ago, was a global leader in this area. It no longer is. So in particular, a number of jurisdictions around the world have moved further than the UK, particularly Europe, but also, for example, some Asian, um jurisdictions are moving much, much more quickly than the UK now. And I would say that certainly in terms of the level of emphasis on this, it has declined.

Um, so we can, we can see that in, in, in practice and certainly, for example, the only about 18 months ago and a, the, the Treasury's mandate letter to the Bank of England made clear, um, a need to think about nature related risks as well. Um and as far as in the public domain, we've seen nothing has progressed on that. And so what we see is, uh, and again, we still see important statements being made by the Bank of England on this. So particularly, for example, recently a recognition around insurance that I mentioned earlier and a recognition around the impacts of climate on prices and the potential implications for monetary policy.

And, and there was the recent, um, update to the expectations on firms, but the emphasis has, has, um, reduced, I would say. And I, and I think that is a very step back and is a step back, as I said, from practice internationally, and I am very involved in the network for greening the financial system, which is the network of global central banks of which the Bank of England is still very active in. Um but certainly if you look at practice across many of the central banks, um, in terms of what the UK is actually doing is, is falling back compared to many others.

So, so I think that, that there is a growing gap. And I would say that certainly in terms of keeping pace with the rate of increase in risks, that's not happening.
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None Portrait Speaker 6
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Very helpful.
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None Portrait Speaker 7
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Mhm.
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This debate has concluded
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