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.
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.
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.
Scenario definition
Project scope
Risk and opportunity heatmaps
Identification of case studies
Deriving impact pathways
Obtaining data
For quantifiable transition and physical risks
For litigation-related risks
Model road testing
Final report
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.
Contact us for support throughout your scenario analysis journey and wider TCFD implementation, including: