In our first collaboration, we provided support for the CDI’s Climate Risk Carbon Initiative – an effort to expose potential climate change-related financial risks faced by California insurance companies as a result of their exposure to fossil fuel-based investments. 2DII’s role was to perform a forward-looking scenario analysis of insurer investments, with a special focus on thermal coal investments. The Department posted the aggregate scenario analysis results on its website and sent individual reports to insurers with the most assets under management and with the greatest exposure to thermal coal.
In addition, in 2018 2DII contributed to a stress test intended to determine climate-related risk to insurance industry investments, the first of its kind in the United States. As part of this work, 2DII conducted an analysis of the 672 insurers in California’s market with more than $100 million in annual premiums, which account for almost $4.3 trillion in investments. It was arguably the most comprehensive financial stress test analysis ever conducted for the insurance sector. Key figures from the forward-looking scenario analysis have been published on the Department’s website.
In our most recent collaboration, in January 2019, the Department publicly released the results of our analysis of the climate risk exposure faced by insurers’ investments. The climate risk scenario analysis was the first of its kind to include analysis of transition risks as well as physical risks (such as drought, floods, and forest fires) faced by insurers’ assets.
Supporting the Bank of England in the 2019 stress test
PACTA stress test with the Bank of England
As part of our climate scenario analysis work, 2DII supported the Bank of England with designing the climate-related aspects of its 2019 stress test. The tool examines exposure to different climate-relevant sectors in order to calculate the effects of climate stress on a portfolio’s value. It can be used by UK insurance companies, as well as by other investors interested in understanding their performance under the UK stress-test.
The tool builds on our “Storm Ahead“ stress test scenario report (January 2019), which provides guidelines for integrating scenario analysis into stress tests of regulated entities.
In June 2019, the Bank of England Prudential Regulation Authority launched its biennial insurance stress test, asking the biggest regulated life and general insurers to provide information about the impact of a range of stress tests on their business. The stress test also includes an exploratory exercise related to climate change, which examines potential impacts on firms’ liabilities and investments stemming from physical and transition risks.
Ongoing partnership with EIOPA, to be completed in 2020
European Insurance and Occupational Pensions Authority (EIOPA)
As part of our PACTA work, we have collaborated with a wide range of national and transnational regulators to help them perform stress-testing and assess climate-related risks to their regulated entities. Our partnership with EIOPA aims to identify and quantify potential climate transition vulnerabilities in the portfolio of European insurers, and will cover the $10 trillion AUM that is managed by insurers on their asset side.
The output comprises two separate analyses:
- An analysis of European insurers’ assets, to determine whether their portfolios are aligned with the Paris Agreement objectives. The analysis is designed to track the extent to which insurance companies’ portfolios are ‘accumulating’ or ‘reducing’ transition risk.
- A quantitative analysis of the porfolios’ total exposure to ‘transition risks’ and potential losses in case of abrupt fall in prices on assets on investments that are climate-relevant. It will also evaluate the potential magnitude of re-valuation under a late and sudden transition (i.e. a scenario sensitivity stress test). This analysis will be supported by a narrative explaining how the potential losses would materialize.