Gimar special topic edition the impact of climate change on the financial stability of the insurance sector

4.1.4 Summary of stress factors
Table 3 summarises the stress factors employed 
for the asset classes and economic sectors for 
each of the scenarios. 
4.2 OUTCOMES OF SCENARIO ANALYSIS
The final step in the scenario analysis is to 
calculate the potential impact by multiplying the 
stress factors with the investment exposures. 
Before moving to the outcomes, it is important 
to highlight inherent limitations and assumptions 
within this analysis.
4.2.1 Limitations and assumptions
As the scenario analysis builds on the data 
collected for this report, the limitations listed in 
section 3.2 are equally relevant to the scenario 
Graph 14:
Stress factors for real estate
Source: Bloomberg, ND-GAIN and own IAIS calculations
𝑓𝑓
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑆𝑆𝑜𝑜𝑣𝑣
= 5𝑌𝑌 𝐶𝐶𝐷𝐷𝑆𝑆
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑌𝑌𝐸𝐸19
∗ 𝑟𝑟𝑒𝑒𝑠𝑠𝑖𝑖𝑑𝑑𝑢𝑢𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑇𝑇𝑟𝑟𝑎𝑎𝑛𝑛𝑠𝑠𝑖𝑖𝑡𝑡𝑖𝑖𝑜𝑜𝑛𝑛 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡 
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑅𝑅𝐸𝐸
= 5𝑌𝑌 𝐶𝐶𝐷𝐷𝑆𝑆
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑌𝑌𝐸𝐸19
∗ 𝑟𝑟𝑒𝑒𝑠𝑠𝑖𝑖𝑑𝑑𝑢𝑢𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑃𝑃ℎ𝑦𝑦𝑠𝑠𝑖𝑖𝑐𝑐𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑅𝑅𝐸𝐸
= 𝑊𝑊𝑅𝑅𝐼𝐼
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
2019
∗ 1 – recovery rate
𝑓𝑓
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑆𝑆𝑜𝑜𝑣𝑣
= 5𝑌𝑌 𝐶𝐶𝐷𝐷𝑆𝑆
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑌𝑌𝐸𝐸19
∗ 𝑟𝑟𝑒𝑒𝑠𝑠𝑖𝑖𝑑𝑑𝑢𝑢𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑇𝑇𝑟𝑟𝑎𝑎𝑛𝑛𝑠𝑠𝑖𝑖𝑡𝑡𝑖𝑖𝑜𝑜𝑛𝑛 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑅𝑅𝐸𝐸
= 5𝑌𝑌 𝐶𝐶𝐷𝐷𝑆𝑆
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑌𝑌𝐸𝐸19
∗ 𝑟𝑟𝑒𝑒𝑠𝑠𝑖𝑖𝑑𝑑𝑢𝑢𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡
𝑃𝑃ℎ𝑦𝑦𝑠𝑠𝑖𝑖𝑐𝑐𝑎𝑎𝑙𝑙 𝑐𝑐𝑜𝑜𝑚𝑚𝑝𝑝𝑜𝑜𝑛𝑛𝑒𝑒𝑛𝑛𝑡𝑡 
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
𝑅𝑅𝐸𝐸
= 𝑊𝑊𝑅𝑅𝐼𝐼
𝑐𝑐𝑜𝑜𝑢𝑢𝑛𝑛𝑡𝑡𝑟𝑟𝑦𝑦 𝑖𝑖
2019
∗ 
1 – recovery rate)

---

35
analysis. For instance, assets out of scope are not 
taken into account when calculating the impact 
of scenarios, although they may contain a portion 
of climate-relevant assets; therefore, the results in 
this section may not fully reflect the actual impact 
of the different scenarios.
The longer time horizons over which the risks 
from climate change manifest also present a 
challenge for quantitative scenario analysis. In 
these scenarios, assumptions need to be made 
about the timing of a shock and the evolution of 
the balance sheets over the time horizon. Given 
the limitations of the data, which excludes firm-
level data and detailed information on maturities, 
balance sheets are assumed to be held static 
at their pre-stress levels (year-end 2019) and an 
instantaneous shock is applied. This means that 
changes in the valuation of liabilities or in the level 
of required capital are not considered.
44
Also, 
potential management actions are not considered. 
Furthermore, second-order effects and other 
macroeconomic effects (like interest rate 
movements) are not considered. Finally, only 
the potential direct losses on asset values are 
considered. Any potential impact on risk-based 
capital requirements as a consequence of changes 
in the asset values, their ratings or assumed 
probability of and loss given default are excluded.
In addition, the stress factors in this paper are not 
derived from proprietary methodologies and are 
not aimed at contributing to the growing body of 
modelling linking climate risks with finance. This 
study uses loss factors applied in recent existing 
analysis and otherwise approximates risk factors 
using the best available data to capture, however 
approximately, the exposures to various risks 
intrinsic to each asset class and sector.
Overall, possible confounding factors on both 
sides of the balance sheet complicate the direct 
interpretation of the results provided here from a 
supervisory perspective. But, consistent with the 
NGFS guide for scenario analysis, the quantitative 
assessment is aimed at providing insight on the 
possible size of the aggregate risks faced by the 
insurance sector. This will create awareness and 
trigger a conversation on the need for possible 
(management) action. The analysis of greater 
implications for financial stability is also limited;