The industry is still in the early stages of climate scenario development. But where do you start?
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Authors:
- Laura Tadrowski, Director- Advisory Services
- Alasdair Thompson, Director- Research;
- Gavin Conn, Director- Research;
- Nick Jessop, Sr. Director- Research
To make informed decisions, build resilience and address regulations, life insurers need modeling and scenario analysis to understand the impacts of climate change on their business. In recent years, there has been growing pressure to become climate aware in the Own Risk and Solvency Assessment (ORSA) and Strategic Asset Allocation (SAA) processes.
We have seen the increased focus from national and international bodies and groups on climate change. The Net Zero Insurance Alliance (NZIA), Task Force on Climate-Related Financial Disclosures (TCFD), and International Sustainability Standards Board (ISSB) are among some of those, calling for detailed scenario analysis in relation to climate disclosures.
In April 2021, the European Insurance and Occupational Pensions Authority (EIOPA) stated that "the materialization of transition risk has the potential of disrupting the sectoral composition of the economy, for example from carbon-intensive to green sectors. This may put carbon orientated investment strategies under pressure with assets becoming stranded". The following year, in May 2022 the Bank of England stated that "banks and insurers will need to prioritize investment in their climate risk assessment capabilities, both by focusing on their internal modeling and data capabilities and doing more to scrutinize data and projections supplied by third parties". They went on to say that in certain scenarios "banks would reduce lending to properties facing greater physical risks and insurers would substantially increase the premiums they charge to insure against such risks, making insurance coverage unaffordable for many of these households".
We are now seeing institutions looking to move on from being climate aware to becoming truly climate resilient. At Moody's Analytics, we hear this from our customers, and we can also see this trend in a recent study we conducted which found that the key drivers for climate scenario analysis were disclosure (TCFD requirements) and regulation. We also see the importance of quantitative modeling coming to the forefront along with the need to address transitional risk and physical risk.
The industry is still in the early stages of its climate scenario development and it has become a priority for many life insurers to start to understand and develop best practices. But where do you start? Read the latest article from Moody's Analytics, and listen to the podcast series: Forward-looking climate scenario analysis for the life insurance sector.
Read more about how Moody's Analytics can help with your climate risk modeling needs.
