Climate Change Scenarios in Context – A Stress Testing Case Study
Climate Risk scenarios are commonly used in the insurance industry for stress testing, but interpreting and communicating results is often challenging, given strong limitations and complex assumptions. Why are physical stresses often so low, and what can be done about this? What is the impact of the recent surge in fossil fuels on transition risk? What is the role of inflation and interest rates within the scenarios?
Furthermore, the scenarios have also substantially evolved over the last years. This has not only substantial implications on results and key messages from stress testing, but also on how scenarios can be applied for stress testing purposes.
This session will have a practical focus around a case study in order to illustrate not only the practical elements of stress testing, but also discuss challenges and limitations and provide context around the foundations surrounding the scenarios. We will introduce commonly used scenarios, provide practical guidance on implementation of stress tests, and discuss key evolutions, challenges, and limitations in the interpretation of stress test results. We will conclude with an outlook on how key challenges are expected to be addressed going forward.