An approach to climate scenario analysis for the insurance industry

PwC supports the UNEP FI PSI TCFD pilot project

PwC has advised a pilot group of 22 leading global (re)insurers convened by the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Insurance (PSI) on implementing the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD). PwC has advised the pilot group to develop a harmonised and transparent analytical approach to climate scenario analysis, which helps to assess climate-related risks and opportunities associated with physical, transition and litigation risks for the (re)insurance industry. This approach is an important first step in the direction of a comprehensive solution for scenario-based portfolio-wide climate change assessment and disclosure for insurance underwriting.

Developing an approach to forward-looking climate scenario analysis

The main objective of the project was to enhance the understanding of climate scenario analysis and possible mechanisms of climate impact on insurance underwriting. The project develops a harmonised approach to the implementation of scenario analysis as part of the TCFD recommendations for (re)insurers, serving as an example and guide for the industry.

A final report has been published for the project which discusses the overall assessment approach, outlines key findings across various lines of insurance business, provides insights on an integrated insurance risk framework for climate-related disclosures, and suggests additional actions to further enhance climate risk management and disclosures in the insurance industry.

Methodological approach

The project was completed over 5 steps as shown below. Extensive engagement with the members was conducted throughout the project in the form of workshops and focus group sessions, with the aim of developing an overarching methodological framework widely applicable across the (re)insurance industry.

5 case studies were defined by the end of step 2 to pilot the quantification approach on specific geographies / risk types / insurance products of members’ interest. The models developed were road tested with the members, with results and implications discussed in the final report.

1. Scenarios definition and scopings

Scenario definition

  • Selected three best suitable scenarios for 1.5°C, 2°C, and “business-as-usual” 3 - 4 °C
  • Selected 3 timeframes (2025, 2030 and 2050)

Project scope

  • Conducted survey on member preferences regarding the project scope
  • Physical: Selecting the hazard, geography, and business line of interest
  • Transition: Selecting the sector, geography and business line of interest

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2. Develop key risk and opportunity heatmap and confirm case studies

Risk and opportunity heatmaps

  • Identified key transition, physical, and litigation-related risks and opportunities based on a qualitative heatmap approach using publicly available climate data

Identification of case studies

  • Informed by the results of the heatmaps and member preferences, case examples were identified for modelling, at the intersection of business lines, geography and sector/ peril

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3. Derive impact pathways (business lines / products) and obtain data

Deriving impact pathways

  • Demonstrated climate impact in the form of qualitative, consistent cause-effect chains on insured assets for prioritized products in each case study
  • Illustrate effect of the impact on insured assets on (re)insurers’ financial performance

Obtaining data

  • Physical: Sourcing appropriate datasets of projected change in hazard
  • Transition: Sourcing appropriate transition scenario data to complement the general scenario data with asset- and region-specific data

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4. Develop modelling / assessment approach

For quantifiable transition and physical risks

  • Identified publicly available climate data suitable for each case study
  • Embedded the impact chain logic from step 3 into an illustrative excel model and calculated financial impacts for case examples
  • Provided modelling input for existing (re-)insurer models based on the developed Excel modelling approach

For litigation-related risks

  • Conducted a deep-dive into the current status and findings on litigation risk based on literature review

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5. Road testing & report finalisation

Model road testing

  • Conducted workshop-based road testing for each case study, exploring the functionality and results of the models and incorporating member feedback

Final report

  • Final report developed including methodology and key findings of case studies

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Key takeaways

Under any climate change scenario insurers will likely face more climate change-related risk, be it physical, transition and/or litigation risk. In the meantime, climate change also presents opportunities to develop new insurance products or expand existing ones within an evolving risk landscape.

Physical risks are assessed by the insurance industry with a high degree of analytical sophistication, but challenges are brought about by access to granular forward-looking physical hazard data. The project sourced climate data and piloted modelling approaches to the property business line under three case studies: fluvial and coastal floods in Canada; floods in European urban centers; tropical cyclones in Japan and the US Gulf Coast.

Transition risks represent a risk category where the insurance industry is less consistently using quantitative methods to assess future impact. The project developed a quantification approach and applied it to two case studies: energy in Germany and Poland, and property in Australia.

Litigation risks are generally not yet assessed by the insurance industry in a quantitative and scenario-based manner. This report defines litigation risk as any risk related to litigation pertaining to climate change and breach of the underlying legal frameworks on both the business and corporate levels, and outlines two distinct but complementary frameworks to assess climate-related litigation risks.

How we can support you in your scenario analysis

Contact us for support throughout your scenario analysis journey and wider TCFD implementation, including:

  • Understanding and scoping of relevant climate scenarios for analysis
  • Review and sourcing of suitable climate datasets
  • Development and implementation of scenario analysis approach
  • Quantification and understanding of financial impact
  • Disclosure in line with regulatory requirements and market expectations

Contact us

Jon Williams

Jon Williams

Partner, Sustainability & Climate Change, PwC United Kingdom

Tel: +44 (0)7595 609666

Rachel Watson

Rachel Watson

Senior Manager, Sustainability & Climate Change, PwC United Kingdom

Tel: +44 (0)7710 396679

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