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Life Insurer Survey: Climate Risk Modeling in the Risk Assessment Process
How prepared are life insurers for including climate risk modeling into their risk assessment and management processes?
Moody's Analytics recently ran a survey, completed by 67 respondents from life insurers across the globe; to understand key priorities, what stage of implementation companies are at, and their future needs.
Climate risk affects many industries in different and increasingly complex ways. There is a lot of modeling uncertainty, both scientific and socio-economic. The Own Risk and Solvency Assessment (ORSA) encourages insurers to understand the risks involved with running their business, from both a qualitative and a quantitative perspective. Unlike other regulatory requirements, the ORSA is not published. Therefore insurers are struggling to understand how the rest of the market is planning to include climate risk in their process. Although it is accepted that climate risk will have to be included in the ORSA, it is unclear how much of it will be qualitative, quantitative, and the timelines for embedding the risk. One of the aims of this survey was to offer some clarity.
The findings have confirmed that the industry is at the beginning of a journey to include climate risk in their analysis, for both strategic and regulatory purposes. It will take time to adopt strong climate modeling methodology, and even longer to gain the confidence necessary to act on the numbers produced. While there is much desire and intent to start this journey, there is a sense of confusion driven by the many challenges that climate modeling presents to risk teams; as well as a lack of clarity, and increasing pressure from a regulatory perspective. It is worth noting that in countries, such as the UK, where regulators have been quick to address the situation and more vocal about it, insurers are more advanced in the adoption of climate risk into their processes.
The top priorities for 2022 are:
- Accessing standardized scenarios
- Being able to perform climate-based sensitivities and base decision-making on them.
This survey report takes a snapshot of the industry's progress for including climate risk into their ORSA and other risk assessment processes, and what it would like climate modeling to consist of in the future, with the requirements necessary for this to happen. We hope that this report will help set the direction for your journey.
