This blog summarises the third in a series of expert-led workshops. It aims to share current thinking on what could constitute climate transition central ‘best estimate’ scenarios, identify key transmission channels, and explore decision relevant use cases across the insurance business. The blog builds on the initial workshop findings and the physical risk workshop.

Recognising the inherent uncertainty in climate outcomes, this blog does not seek to prescribe a single answer. Instead, it brings together expert perspectives to help firms develop their own central climate scenarios and better understand how transition risks may affect their business. The views expressed do not represent the specific opinions of any participants or their organisations.

Continue reading to get the blog summary, or see the full summary of findings below.

Workshop objectives

The workshop discussion considered how transition risks might affect assets, liabilities, products, operations, disclosures and strategy, including:

1. The transmission channels through which transition risks affect insurers.
2. The challenges insurers face in assessing the impacts and timings of transition-related developments.
3. The monitoring that can help insurers measure and track transition risks over time.

Current observations and backdrop

Transition risk remains highly uncertain with outcomes shaped by evolving technology, policy, market dynamics and societal preferences. While the overall transition is underway, the timing and magnitude of impacts remain extremely difficult to predict, meaning that transition risk requires additional attention from insurers. Transition risks can affect insurers through multiple channels:

• Assets: Changes in regulation, technology, consumer preferences and market sentiment can affect investment values. Participants highlighted the potential for non-linear market adjustments, both from short-term changes in policy stances and technology, alongside the risk of a broader re-think of our economic prospects under climate change. 
• Liabilities: Transition-related developments may affect claims, pricing and demand for new products through changing risk profiles, inflation and shifts in mortality and morbidity. While insurers can generally adapt to emerging risks, broader economic and behavioural impacts remain uncertain.
• Operations and strategy: Firms may face governance, regulatory, litigation, reputational and strategic challenges as the transition evolves.

A key theme was the importance of external dependencies. Climate risk spans multiple functions, requiring clear ownership and coordination across organisations. Many climate commitments depend on the actions of governments, customers, suppliers and markets, making it important for firms to distinguish between outcomes they can directly influence and those that rely on wider system change.

The workshop highlighted the limitations of relying solely on traditional carbon metrics. Carbon footprints can provide useful information but may not fully capture transition risk. Their interpretation depends on assumptions about future policy, technology, market developments and customer behaviour. Participants also discussed the distinction between transition pressure and transition readiness. 

Transition pressure reflects the external forces driving change, while transition readiness reflects an organisation's ability to respond. Assessing transition risk requires understanding the degree to which a particular firm is ready to meet the level of challenge in its industry and location. 

Transition readiness can also be considered in multiple ways, companies with high emissions may nonetheless be well positioned to respond to the transition, offering products which will be in high demand, and conversely, a firm may have done extensive work setting climate goals without becoming strategically well-prepared. 

Overall conclusion

Transition risk is complex, uncertain and potentially non-linear. While investment exposures remain a primary area of focus, insurers must also consider impacts on liabilities, operations, governance, reputation and strategy. 

The workshop highlighted the importance of developing central climate scenarios that consider multiple transmission channels, explicit assumptions regarding external dependencies and the potential for non-linear market responses. 

Effective risk management requires looking beyond carbon metrics to assess both the transition pressures firms face and their readiness to respond, helping firms make better-informed decisions and assess the resilience of their business models under a range of future transition pathways.

See full summary of findings

Acknowledgements

The Central Climate Scenario Workshop Group consisted of Loubna Benkirane, Oliver Bettis, Ruth Bryson, Zahrah Fauzee, Hetal Patel, Yoselin Oropeza, Charlie Howell and Claire Booth, who attended in a personal capacity.

We want to thank Orlaith Lehane, who spoke to the participants about the results of the Society of Actuaries in Ireland’s survey of Irish insurers on their baseline (central) climate scenarios. Please see here: Sustainability and Climate Change Committee | Society of Actuaries in Ireland. We also want to thank Maria Lilli and Guido Giese from MSCI who presented on MSCI’s Climate Risk Metrics tools. 

Summary of findings: Transition risk central climate scenario

The workshop on transition risks was divided into three parts:

• The transmission channels through which transition risks affect insurers.
• The challenges insurers face in assessing the impacts and timings of transition-related developments.
• The monitoring that can help insurers measure and track transition risks over time.

The summary and key findings are given below. 

Transition is already visible across the economy through the growth of renewable energy, increased adoption of electric vehicles and expanding climate-related disclosure requirements. 

However, the pace, scale and direction of future transition pathways remain uncertain. Future pathways will depend on a range of political, technological, economic and social factors. 

Participants noted that improving economic conditions and the increasing commercial viability of lower-carbon technologies, such as renewable energy production, may continue to drive change even in the face of political resistance. 

At the same time, the rapid adoption of AI introduces additional uncertainty, while also creating opportunities for greater energy efficiency and innovation.

This uncertainty surrounding future transition pathways presents a significant strategic and risk management challenge for insurers. This is particularly relevant for life and pensions insurers, where the impacts of transition risk are expected to be greater than physical risk impacts in the short term.

A lack of global transition, or a delayed and disorderly transition, is likely to lead to greater physical risk impacts in the long run. While we will avoid repeating the findings of the physical risk workshop here, these consequences should be kept in mind: there could be significant global disruption, including geopolitical conflicts, forced migration, supply chain breakdowns, worsening economic inequalities, and health funding or availability challenges. 

Even for countries not directly affected by the worst physical impacts, the economic impacts would be significant, with knock-on effects on asset values, population health outcomes and take-up of insurance policies. Changes associated with the transition create both risks and opportunities for insurers through several channels, for example:

• Investments in companies, bonds or physical assets which are affected by changes in regulation, consumer preferences, government policy or technological change. 
• Liability values on existing products could be affected by inflationary pressures and employment sector shifts, whilst insurers may cover new products (for example electric vehicles) including those where there is limited reliable data supporting risk pricing.
• Compliance with new regulatory requirements, reputational and litigation risks, and new strategic challenges.

The workshop considered each of the above three channels in turn.

Assets

The asset side of the balance sheet was a central focus of the discussion and is currently where many firms have concentrated their efforts when considering transition risks. However, participants highlighted considerable uncertainty regarding how and when transition risks may be reflected in financial markets.

Transition-related policy changes or other events have the potential to lead to a dramatic shift in market expectations over a short period of time. Increasingly, these shifts are not just in one direction, given the risk of U-turns which may or may not hold, with a recent example being the UK’s policy on North Sea oil and gas.

Participants discussed the risk of a sudden readjustment reflecting the risks posed by climate change and the prospects for economic growth in a world rocked by climate disruptions. As many market participants focus on relatively near-term outcomes, if there are transition risks that are perceived to lie beyond these horizons, they may not be fully reflected in asset prices. However, should these risks become imminent, expectations would change, and markets would shift rapidly to reflect this new outlook on the future. 

In the workshop, the group debated whether this dramatic realisation could be considered inevitable. Will increasing physical climate risks at some point make transition so undeniably important that a rethink of priorities must occur? Or might the consequence of escalating physical risks be a lack of capacity to transition? Regardless of the view taken, participants noted that the specific timing of a change cannot be known, and outlasting the market could be its own challenge.

Liabilities 

Although transition risk is often first considered through an investment lens, there are key drivers through which liabilities can be impacted.

For general insurers, transition risk may give rise to new insurable risks and product opportunities. For product-related risks, the consensus was that insurers are well prepared to address new product developments. Taking the example of electric vehicles, claims patterns may differ from those for petrol or diesel vehicles, but understanding these differences and pricing accordingly is a core part of insurers’ expertise. Models will adapt as greater experience emerges, and this fits neatly into the standard risks’ insurers handle.

More broadly, transition might be expected to lead to greater inflation as the higher initial costs of green infrastructure are absorbed. Additional impacts may emerge through growing demand for “green” products and labour market changes. These transition changes can affect mortality and morbidity directly, for example through reduced air pollution from green transport, improved health from low-meat diets, or new workplace safety risks in green industries. The impact can also be indirect: where transition changes affect the economy, they may affect state funding for healthcare, as well as the expense and time individuals can afford to spend on healthy diets and exercise.

Transition risk changes are likely to be closely linked to broader consumer behaviour. Transition changes, whether policy-, technology- or market-driven, will affect the money customers have available to spend on insurance and savings products, as well as what they spend on adapting their homes or transitioning to green technology.

Operations, governance and strategy

While there are several ways in which transition risks affect insurers’ operations, the key issues that stood out in the discussion were governance and the way external dependencies increase reputational and litigation risks. Governance of climate risks can be complicated by the wide-reaching nature of these risks, which may sit with a range of leaders. Securing co-operation and clear ownership can be difficult. This can be further complicated by the external environment.

Despite overall progress on transition, there has been increased fragmentation in regulatory approaches across the globe. Insurers operating across multiple jurisdictions can face different, and sometimes conflicting, regulatory requirements with global consensus on the necessary scale and speed of change lacking. This can increase costs and complexity, particularly for global insurers and asset managers. More generally, a lack of policy certainty impacts confidence among those trying to develop and roll out new technologies.

Litigation risk was also seen as becoming more nuanced. Firms may face external challenges for doing too little on climate but may also face external challenge for the climate-related policies or commitments they have made. Even where criticism is not valid, the management time and cost involved in resolving such issues can be a significant burden. In this sense, transition risk is ‘two-sided’: both faster-than-expected and slower-than-expected pathways can have material financial implications. 

Participants emphasised that many climate ambitions depend on the actions of governments, regulators, customers, investee companies and wider markets. Where these dependencies are not clearly articulated, stakeholders may overestimate the degree of control insurers have over delivering transition outcomes, increasing reputational and litigation risks. Participants stressed the importance of distinguishing between actions within an insurer's control and outcomes that rely on external actors.

Without that clarity, there is a risk that stakeholders may misinterpret the extent to which an insurer can deliver a stated transition plan or climate ambition independently, and insurers may face an unfair level of criticism. The same issue applies to metrics. A metric may appear precise, but its interpretation can depend heavily on assumptions about policy, technology, customer behaviour and market responses. It was noted that it may be helpful to apply a credibility assessment to carbon footprint goals and measurements to allow for such uncertainties.

Expert input from MSCI: moving beyond carbon footprint

The workshop included a presentation from MSCI on climate risk metrics and transition risk measurement, which reinforced several themes from the wider discussion. It highlighted a shift from viewing net zero initiatives as a reputational necessity and as a means of mitigating transition risk, towards a more nuanced assessment of the transition pressures facing firms and their readiness to respond.

MSCI made an important distinction between climate alignment and transition readiness. A company or portfolio may appear aligned with a particular climate framework without being strategically well positioned for the transition. Conversely, a company may ignore climate reporting frameworks and be a significant polluter, while also having a strong strategy that benefits from transition dynamics.

MSCI stressed the importance of differentiating between transition pressure and transition readiness. Transition pressure captures external forces, such as policy pressure and business model exposure. Transition readiness considers whether a company is prepared to respond, including through strategy, governance, targets, emissions performance and transition-related opportunities. Using these scales, firms could be mapped and classified as those prepared for the transition forces, they face, those unprepared for the transition forces they face, those resilient to transition forces should they increase, and those exposed if transition pressures rise.

This distinction avoids treating high emissions, being under high pressure to transition, and being unprepared to transition as interchangeable concepts. The approach to measuring transition risks then follows from these definitions, considering metrics that assess a firm’s climate impact alongside those that assess its exposure to transition risks. For short-term risks, they consider what decision-useful signals can be extracted from current data, while considering how scenario analysis can be used to explore longer-term uncertainty.

Challenges and uncertainties

Transition risk is complex due to the various ways in which the world may change and the many dependencies in play. Accounting for transition risk in a central scenario will be difficult. 

In the short run, there are ways to assess firms’ immediate exposure to transition pressures, but in the long run, political and technological change is subject to substantial uncertainty. 

A central scenario must therefore be careful in specifying its use case and the time frame considered and must remain transparent about its limitations.