An approach to climate risk analysis – PwC supports global pilot project in the insurance industry

January 20, 2021

Over the past year, 22 of the world's leading insurance companies have collaborated under the auspices of the Principles for Sustainable Insurance Initiative (PSI) of the United Nations Environment Programme (UNEP) to explore and pilot methods for scenario analysis in the insurance business. The goal was to implement the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD). This project was advised by PwC and The Sabin Center for Climate Change Law at Columbia Law School, and follows on from TCFD studies previously undertaken by UNEP's Finance Initiative on Banking and Investment. The overall objective of this pilot project is to contribute to the development of consistent and transparent analytical scenario analysis approaches that can identify, assess, and disclose climate change-related risks and opportunities in insurance-related portfolios in a forward-looking manner.

Given that regulators are no longer discussing the "if" but only the "how" of introducing so-called climate stress tests and scenario analyses, the project provides an important impetus to methodological approaches.

The final report discusses the general approach to assessing the three main climate change risks: transition risks, physical risks, and litigation risks. It outlines key findings across different lines of insurance, provides insights into an integrated framework for climate-related insurance risk disclosures, and suggests additional measures to further improve climate risk management and disclosure in the insurance industry.

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The gist in 30 seconds

In the context of quantitative approaches to addressing transition and physical risks, as well as considering litigation risks and their interactions, the report creates a foundation for the insurance industry to assess climate change risks in a holistic manner.
The methodologies developed represent a groundbreaking and continuing approach to capturing climate-related litigation risks, while existing best practices on physical and transition risks have been expanded.
The results show that climate change presents not only risks, but also opportunities to develop new insurance products or enhance existing products within a changing risk landscape.

"This is the type of effort needed for insurers to address climate risks more efficiently, to be at the forefront of risk management, and to drive greater climate action by the wider insurance industry, its policyholders, and its stakeholders."

Mark Carney,UN Special Envoy on Climate Action & Finance and UK Prime Minister's Finance Adviser for COP26

Your expert for questions

Antonios Koumbarakis
Head Strategic Regulatory & Sustainability Services at PwC Switzerland

Establish a unified approach to assessing the impacts of climate change

The objective of the PSI was to develop a general approach to assessing climate change risks for insurance products. The report outlines key findings across different lines of insurance, provides insights into an integrated framework for climate-related insurance risk disclosures, and suggests additional measures to further improve climate risk management and disclosure in the insurance industry.

Approach

The report evaluates climate-related physical risks, transition risks, and litigation risks in insurance portfolios – particularly on the basis of a scenario analysis – and identifies starting points for the integrated consideration of these risks.

The pilot group developed approaches and analytical tools to test innovative approaches to climate risk analysis. The tools and indicators developed during the project are based on the scenario analysis method to determine climate-related risks and opportunities for insurance-related portfolios in the future.

Results

The report recognizes that the insurance industry needs to assess climate change risks in an integrated way. The findings also show that climate change not only poses risks, but also creates opportunities for developing new products or expanding existing insurance products in a changing risk landscape. The industry can thus help improve understanding of the types of existing and new risks society may face in a changing climate.

Outlook

Managing risk is the purpose of the insurance industry. A better understanding of climate-related risks and opportunities and the publication of decision-relevant information should position the insurance industry as a transparent, accountable, stable and resilient partner in dealing with climate change. Looking at the big picture based on the latest climate science, this decade leading up to 2030 represents the most critical period for the world to influence the global emissions trajectory to meet the goals of the Paris Agreement.

"International initiatives such as the EU Action Plan and the TCFD acknowledge that climate-related and environmental risks are a source of financial risk. In order to manage these risks, the financial and insurance sectors have to take climate related litigation risks into consideration."

Antonios KoumbarakisHead Strategic Regulatory & Sustainability Services at PwC Switzerland