Climate scenarios in general insurance

Climate scenarios in general insurance The IFoA Sustainability Working Party’s climate scenarios sub-group explores use of climate scenarios in the non-life insurance industry and by regulators in assessing climate change impact. The authors focus on the developed insurance markets in North America and Europe.

In this post:

What are climate scenarios?

Climate scenarios refer to future states that reflect different possible climate policies and their associated physical and macroeconomic impacts.

Climate scenarios allow organisations to develop an understanding of various combinations of climate related events and risks, both transition and physical*. It helps them to understand how these combinations may affect their operations, businesses, strategies, and financial performance over time. Climate scenario analysis is a key process for identifying and assessing the potential implications of significant climate risks facing organisations.

*The UK’s Prudential Regulation Authority defines physical risks as: “The first-order risks which arise from weather-related events, such as floods and storms. They comprise impacts directly resulting from such events, such as damage to property, and also those that may arise indirectly through subsequent events, such as disruption of global supply chains or resource scarcity.” (Prudential Regulation Authority, 2015)

Current regulatory guidance on climate scenarios

Here we explore regulatory guidance in the UK, US, EU, and Canada.

Task Force on Climate-Related Financial Disclosures

For scenario analysis, TCFD recommends to:

  • use climate scenarios to help inform strategic and financial planning processes
  • disclose how resilient the strategies are to a range of plausible climate related scenarios

Scenario analysis is likely to be a qualitative exercise for many organisations. A more rigorous scenarios analysis with respect to key drivers and trends that affect the business and operations is required from organisations with significant exposure to climate risks. (See section D of in the TCFD recommendations report.) This might include quantitative assessment.

In its 2022 report, TCFD has recommended that companies describe the resilience of their strategies considering different climate-related scenarios, including a 2°C warming or lower scenario.

Intergovernmental Panel on Climate Change

The IPCC designed 5 shared socio-economic pathways (SSP1 to SSP5) as possible future projections based on differing levels of greenhouse gas (GHG) emission mitigation. 

United Kingdom

Here we look at SS3/19, the climate biennial exploratory scenario, the general insurance stress test, and the realistic disaster scenario.


The SS3/19, a supervisory statement dated April 2019, is relevant to all UK insurance, reinsurance firms, and banks. It sets out Prudential Regulation Authority’s (PRA) expectations concerning the strategic approach firms are taking to manage the financial risks arising from climate change. It requires firms to use (long term) scenario analysis to help inform strategy setting and risk management.

Climate biennial exploratory scenario (CBES) 2021

The Bank of England developed 3 scenarios designed to explore the physical and transition risks of climate change. It asked participating firms to evaluate their risk exposure across their largest counterparties and the longer-term implications on their business models in the scenarios of:

  • early action
  • late action 
  • no additional action

General insurance stress test (GIST) 2022

The GIST is an exercise devised by the PRA. It invites the largest general insurance companies to provide information about the impact of a range of stress scenarios on their business. 

Its objective is to: 

  • assess the sector’s resilience to severe but plausible adverse scenarios
  • guide supervisory activity
  • enhance the PRA’s and firms’ ability to respond to future shocks

Realistic disaster scenario (RDS) 2023

Lloyd’s maintains a set of mandatory realistic disaster scenarios to stress test both individual syndicates and the market as a whole. The event scenarios are regularly reviewed to ensure they represent material catastrophe risks.

European Union

The European Insurance and Occupational Pensions Authority (EIOPA) published application guidance on running climate change materiality assessment and using climate change scenarios in the ORSA in August 2022.

Based on the Opinion released in 2021, the application guidance: 

  • provides a detailed and practical basis on how to implement sustainable finance ambitions in practice
  • gives insights into where undertakings have the possibility to address climate change risks in ORSA
  • provides examples using mock non-life and life companies to help undertakings design the steps for the materiality assessment and run climate change scenarios


The National Association of Insurance Commissioners has set up the Climate and Resilience Executive Task Force to coordinate discussion and engagement on climate-related risk and resiliency issues with various stakeholders. Its public reporting requirements for climate-related risks are expected to be in a manner that builds on the 4 core elements of the TCFD, to the extent consistent with the US regulatory framework and the needs of US regulators and market participants.

The New York Department of Financial Services has joined the Network for Greening the Financial System (NGFS). It has also issued ‘Guidance for New York Domestic Insurers on Managing the Financial Risks from Climate Change’. The guideline talks about scenario analysis.


Canada’s Office of Superintendent of Financial Institutions (OSFI) issued ‘Guideline B-15: Climate Risk Management’ in March 2023. One of the guidelines is for federally regulated financial institutions (FRFIs). It says they should use climate scenario analysis to assess the impact of climate-related risks on their risk profile, business strategy, and business model. They should assess the impact of both physical and transition risks. They should consider a range of plausible and relevant models and climate scenarios, over the short, medium, and long term. When selecting climate scenarios they should consider industry-accepted sources such as the International Energy Agency, Intergovernmental Panel on Climate Change, and NGFS besides internal. 

In May 2023 OSFI requested FRFIs to complete a self-assessment questionnaire to better understand the current practices ahead of the phased-in implementation of Guideline B-15. The questionnaire included detailed queries on the FRFI’s current scenario analysis framework.

In October 2023, OSFI published a draft document describing the standardized climate scenario exercise (SCSE) to obtain feedback from the Industry. It plans to publish a final SCSE document in 2024.       

Current market practices

Here we look at The Network for Greening the Financial System, and the progress of insurers Swiss Re, Aviva, and Phoenix Group so far. 

The Network for Greening the Financial System 

The Network for Greening the Financial System (NGFS) partnered with an expert group of climate scientists and economists to design a set of hypothetical scenarios, now available in the expanded 2022 version. They provide a common and up-to-date reference point for understanding how climate change (physical risk) and climate policy and technology trends (transition risk) could evolve in different futures. Each scenario was chosen to show a range of higher and lower risk outcomes including:

  • orderly
  • disorderly
  • hot house world
  • too little, too late

Swiss Re

Swiss Re has been leading net zero transition in the reinsurance industry. As a founding member of Net Zero Insurance Alliance and Net Zero Asset Owner Alliance, Swiss Re has been actively engaged in net zero discussions. The company provides significant disclosure under the section ‘climate related financial disclosures’ in its annual report. In this report, Swiss Re also tries to test the resiliency of its strategy under ‘representative concentration pathway’ (RCP) scenarios (RCP2.6, RCP4.5, RCP8.5). NGFS scenarios (orderly, disorderly, and hot house world) represent different degrees of transition risk along different global warming pathways and are linked to RCP scenarios.

Swiss Re assesses the impact on catastrophe reinsurance arising from climate change under the 3 RCP scenarios over the short, medium, and long term. It exposes the property portfolio under the 3 scenarios to assess the impact on annual expected losses (AEL). Then it quantifies the impact of significant catastrophe events on the portfolio AEL. The benchmark used to compare the outcome of this scenario analysis is the losses occurred over the past decades from weather-related events. The final outcome is then the comments on significance of losses on the portfolio and if they are manageable.

While doing its climate scenario analysis, Swiss Re also recognises the fact that there are other factors also could be correlated with climate risk. Considering climate risk in isolation may not be a reasonable assumption to drive the company’s strategic decisions. These factors could include its risk appetite, market conditions, socio-economic environment, resilience of buildings, infrastructure against storms and floods, and other climate adaption measures that will develop. Therefore, any climate scenario exercise to measure the impact over the medium to long term must consider all of these factors given that AEL is likely to be a function of the complex relationship between these factors and possibly others too. Currently, Swiss Re does not conduct such a complex scenario exercise and it would be worthwhile to see how one of the largest reinsurer devise its scenario strategy in the coming years.

Swiss Re ensures resiliency of its property portfolio by using strategies such as diversification, portfolio steering, updated catastrophes models, and the qualitative scenario analysis to assess the material risks arising from climate change.

For its life and health portfolio, Swiss Re recognises that there is very little research available to enable assessment of impact of climate change on morbidity and mortality. There could be other factors that have significant impact on health and mortality including age, gender, comorbidities, and socio-economic status. It is difficult to conduct quantitative scenario analyses in such a case. Therefore, the qualitative method is considered to be the viable and better approach for such portfolio.

For its casualty book, Swiss Re monitors the climate change litigation landscape, potential litigation, and claims scenario under the 3 sets of scenarios we have discussed.


Aviva has used a climate value-at-risk measure to assess the impact on shareholder funds under the following 4 IPCC scenarios: 

  • 1.5°C (aggressive mitigation)
  • 2°C (strong mitigation)
  • 3°C (some mitigation) 
  • 4°C (no further mitigation)

It has also aggregated these outputs to determine the overall impact across all scenarios by assigning relative likelihoods to each scenario. It has looked at both physical and transition risks. As per the analysis, Aviva is most exposed under the 4°C scenario.


The group’s approach to modelling climate-related financial risk is in line with its overall approach to stress and scenario testing. A key feature of this is the feedback loop from the scenario results through to developing and refining management actions. These include to:

  • review risk profile
  • select and define scenario test
  • analyse
  • validate scenario results
  • report results
  • feedback management actions

In 2022, Phoenix continued to build on the significant progress made in its climate analysis approach. It uses both quantitative and qualitative analysis to assess its exposure and mitigating actions for climate risk.

Quantitative scenario testing has been used to assess financial impacts on its assets and liabilities of a variety of potential climate-related pathways using CBES. For example, Phoenix has:

  • used a greater number of climate related scenarios, including 3 developed by the NGFS and 2 by the Inevitable Policy Response
  • used a bottom-up assessment of climate change risks impacts on individual asset holdings much more widely across its investment portfolio to allow for their idiosyncratic nature and the individual actions they may take to decarbonise
  • developed a dynamic balance sheet capability (in contrast to the fixed balance sheet approach specified by CBES) 

The dynamic balance sheet capability allows the expected evolution of the business to be modelled to reflect the evolution of Phoenix’s balance sheet in line with its annual operating plan. For example, the run-off of in-force policies and expected new business volumes.



The IFoA Sustainability Working Party’s climate scenarios sub-group are:

  • Debarshi Chatterjee
  • Dhruv Gavde
  • Ritesh Gulati
  • Juweena Appanah
  • Mohit Arora


The views expressed in this post are those of the individual authors, and not necessarily those of the Institute and Faculty of Actuaries or those of their employers. Information within this post is correct as at the date of writing. Hence, there may be subsequent updates which are not reflected. Any reader should still reference the underlying legislation and standard, and should there be any conflict, the underlying information in the relevant standard or legislation supersedes any information presented in this post.

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