The Central Climate Scenario Workshop Group summarises the second of a series of workshops that aims to share insights on current thinking on what could constitute climate central ‘best estimate’ scenarios.
This blog summarises the second in a series of expert-led workshops. It aims to share current thinking on what could constitute climate physical central ‘best estimate’ scenarios, identify key transmission channels, and explore decision relevant use cases across the insurance business. The blog builds on Developing central climate scenarios: initial workshop findings.
Recognising the inherent uncertainty in climate outcomes, this blog does not seek to prescribe a single answer. Instead, it brings together expert perspectives to support firms in developing their own central climate scenarios, strengthening understanding of physical risk, and identifying relevant use cases. The blog does not represent specific views of any of the participants, their organisations, or affiliations.
The workshop on physical risks was divided into three parts, aiming to address the following three objectives:
Physical risk is already material, with severe weather events increasing in both frequency and severity. Regulatory expectations continue to rise, with firms increasingly expected to embed climate change impacts, including physical risk, within core decision-making. These impacts are being felt across insurers’ balance sheets and operations:
There is a clear and growing need to move beyond high‑level narrative towards decision‑useful climate scenarios that support near‑term (1 to 3 years) risk management and longer‑term (10+ years) strategy. The extent to which these risks translate into financial losses depends critically on the pace and effectiveness of adaptation and resilience measures to transition to lower emissions futures. There are also opportunities for insurers to develop new products and services to address gaps.
A recurring workshop theme was that the relevant time horizons (short, medium and long-term) and variables for assessing physical risk under a central case scenario depended on the use case.
A key point was that longer-term impacts on assets may be recognised by markets in the short-term and that long-term impacts on liabilities should be recognised within best-estimate calculations and solvency evaluations. In the short term, physical consequences on the macroeconomy – such as market volatility, inflation and interest rates – may lead to the most significant impact.
The bespoke and granular nature of the different factors, dependent on asset, liability and operational structures means these assessments will be needed to be explored through risk mapping by individual insurers, and a global ‘standard’ market-based stress test is unlikely to be suitable. Further details of the workshop findings, including a write up of its three workstreams is provided in the attached paper.
The Central Climate Scenario Workshop Group consisted of Oliver Bettis, Loubna Benkirane, Adél Drew, Ruth Bryson, Zahrah Fauzee, Charlie Howell, Jason A. Lowe, Hetal Patel, Yoselin Oropeza, William Graham, David Rochester, Nick Spencer, Wendy Walford and Claire Booth who attended in a personal capacity.
