Testing strategy through climate scenario analysis

Potential long-term impacts of climate change are wide-ranging and uncertain, and
although the element of the unknown presents a significant challenge, we should find new ways to investigate the issues at hand. How will changes in the physical environment and shifts in demand driven by the transition to a low-carbon economy impact insurers? The industry is in a unique position to react – not only does it have the power to affect
markets, helping to close the low carbon investment gap through asset allocation strategy, it can also reduce the climate protection gap through its product offerings.

Climate feedbacks, such as the release of carbon from the soil as a result of surface warming, are accelerating the pace of change. As extreme weather events increase in frequency, it may no longer be sufficient to rely on annual repricing of insurance premiums in response to incremental movements in risks. Stakeholders expect insurers to uphold their role in the market and continue to provide risk protection into the future. Unaffordability in the context of flood insurance in northern Australia is already an issue, and home insurance premiums in California are rising to untenable levels to cover the cost of the increasing number of wildfire events. Models that rely on historical data are poorly placed to project long-term results, and may result in underestimation of costs. If insurers want to plan for the coming decades to ensure that they remain profitable, alternative tools should be considered.