Physical and transition risk in insurance

There are growing pressures and sound business reasons for life and property and casualty (P&C) (re)insurers to address the risks and opportunities arising from physical and transition risk.

Physical and transition risk assessment is a new endeavor for many insurers, requiring new datasets, expertise, and approaches to operationalizing the insights from our analytics.

Moody’s partners with (re)insurers to help them get started and progress over time to more quantitative physical and transition risk analytics to meet their regulators’ expectations.

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What we do

Moody’s solutions utilize the best available science, data, and analytics for quantitative physical and transition risk assessment.

Understand financial impacts

We help life and P&C insurers understand the financial impact of material physical and transition risks across both sides of their balance sheets, including market, credit, and catastrophe risks.

Better understand business resilience

Our holistic, forward-looking, scenario-based approach facilitates capital stress-testing, what-if, and sensitivity analysis to better understand business resilience, shape strategy, and align portfolios.

Integrate into existing frameworks

We offer a straightforward approach to incorporating physical and transition risk into your existing risk management frameworks for mitigation and adaptation planning.

Utilize your systems or ours

Our extensive datasets, analytics, and tools are accessible via our own platforms or through application programming interfaces so you can easily and flexibly fit them into your workflows.

Speak to our team today

Interested in learning more about our offerings? Our solutions specialists are ready to help.

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How we help

01 Quantifying physical and transition risks
02 Strategy
03 Portfolio steering and risk management
04 Monitoring, reporting and disclosing
05 Catastrophe modeling

01 Quantifying physical and transition risks

Quantifying physical and transition risks

We help insurers understand the financial impact of material physical and transition risks covering both sides of the balance sheet, including market, credit, and catastrophe risks, and we have the required building blocks in place to make sure existing risk practices are fully adjusted.

02 Strategy

Strategy

Moody’s solutions assist insurers in shaping strategy, setting risk appetite, and testing business resilience through:

Consistent scenario-building across both sides of the balance sheet under different Representative Concentration Pathways (RCPs) for physical risk and Network for the Greening of the Financial System (NGFS) scenarios for transition risks.
Internal and regulatory scenario exercises with shorter time frames to act as a stress test on an insurer’s capital and business resilience as well as to update the Own Risk and Solvency Assessment (ORSA) to capture physical and transition risk impacts on insurance businesses. This includes regulatory stress tests with both static and dynamic balance sheets.
Medium- and longer-term what-if exercises under different scenarios to inform sustainable business strategy.
Sensitivity analysis highlighting how relevant physical and transition shocks impact risk exposures, strategies, and financial positions. Apply different scenarios or assumptions to understand the potential worst-case effects.

03 Portfolio steering and risk management

Portfolio steering and risk management

There are increasing demands from insurers’ regulators to integrate new physical and transition risk tools and methodologies into existing risk management frameworks.

With Moody’s, insurers’ actuarial, risk management, investment, and underwriting functions can rethink risk and make sure existing practices are adjusted to mitigate, adapt, and transition toward net zero.

Our solutions can help you:

Assess investment and underwriting portfolios’ vulnerability to physical and transition risk based on adjusted risk metrics and forward-looking metrics.
Align investment and underwriting portfolio strategies with revised risk appetites and transition targets.
Calculate capital resource allocation based on strategic resource allocation using revised capital market assumptions, asset and liability management (ALM), and risk capital requirements, as well as maintaining adequate reinsurance coverage.
Achieve consistency across both sides of the balance sheet for ALM and ORSA purposes.
Set portfolio decarbonization targets and engagement strategies using company transition risk assessments that cover carbon footprints, stranded assets, brown-share assessments, and temperature alignment data.
Calculate or estimate carbon footprints and emissions for real estate, offering detailed (bottom-up) insights that can be compiled at the portfolio level.
Set building emission benchmarks toward net zero using Carbon Risk Real Estate Monitor decarbonization pathways or a proprietary one. You can also utilize a library of measures for energy efficiency and decarbonization, estimating the cost of upgrades to meet these targets.

04 Monitoring, reporting and disclosing

Monitoring, reporting and disclosing

Effective monitoring and reporting on physical and transition risk is vital for insurers across a variety of areas, from regulatory compliance to strategic planning and financial stability.

Enrich physical and transition risk reporting

New comprehensive risk metrics and targets for internal and external reporting, including ORSA and new public financial disclosure standards including ISSB, CSRD, and more
Impact of physical and transition risks on the financial position over the short, medium, and long term
Resilience of an insurer’s strategy when facing physical and transition risk-related changes
Probable maximum loss of insured products from weather-related natural catastrophes
Total amount of monetary losses attributable to insurance payouts from natural catastrophes
Scope 1, 2, and 3 greenhouse gas financed and insurance-associated emissions following Partnership for Carbon Accounting Financials (PCAF) protocols
Monitor and report on the effectiveness of risk management strategy through the ORSA
Monitoring performance versus risk limits
Active monitoring of macro-economic impacts from physical and transition events, particularly interest rate and inflation risk exposures
Monitoring the impacts of physical risk on mortality and morbidity patterns, supplemented by continuous monitoring of long-term trends

05 Catastrophe modeling

Catastrophe modeling

Moody’s industry-leading, comprehensive models offering forward-looking views of risk capture the near- and long-term risk outlook.

They empower you to address the challenges physical and transition risk poses so you can improve your risk selection, optimize your portfolio, and embed your view of risk into your overall view of catastrophe risk.

Understanding financial impacts

01 Liabilities
02 Assets
03 Catastrophe models

01 Liabilities

Liabilities

Moody’s helps both P&C and life insurers assess physical and transition risk impacts on their underwriting portfolios:

Physical risks

Understand, evaluate, and manage physical risk in multiple regions using a probabilistic modeling approach:

Gain a deeper understanding of physical risk’s impact on specific perils.
Seamlessly adjust time horizons and RCPs to capture different scenarios’ effects.
Leverage a proprietary industry and economic exposure database for more accurate and effective analyses.
Utilize a full range of future scenarios based on robust science and informed by data from the IPCC.

Transition risk

Calculate insurance-associated emissions based on PCAF methodology to establish a baseline and a detailed understanding of the greenhouse gas emissions associated with an insurer’s underwriting portfolio.

Life insurers

Mortality and longevity modeling equips insurers with advanced insights to gauge risk effects on mortality rates and life expectancy. Through analyzing historical data and predictive trends, insurers can adjust premiums, reserves, and risk mitigation strategies in response to health risks. This not only helps with precise pricing and financial planning but also enhances insurers' capacity to foresee and adapt to the evolving landscape of these risks.

02 Assets

Assets

Our solutions support both physical and transition risk modeling for multi-asset class portfolios, including equities, corporate and sovereign bonds, corporate real estate, structured products, and more.

Physical risk modeling and scenarios

Risk levels of hazards and damage such as floods, heat stress, wildfires, hurricanes, sea level rise, and water stress at different levels of granularity, including global and regional, sector, company, or individual location levels
Globally comparable hazard and impact scores to identify which hazards are material now or in the future and which location or aggregated segment carries high risk. You can assess the physical risk impact via the damage rate under different RCP scenarios
Forward-looking macro-economic forecasts with an 80-year horizon, fully aligned with NGFS scenarios

Transition risk modeling and scenarios

Calculate financed reported and estimated Scope 1-3 emissions based on PCAF methodology to establish a baseline.
Perform adjusted macro-economic forecasts with an 80-year horizon, fully aligned with NGFS scenarios

Market risk

Moody’s top-down scenario analysis allows insurers to analyze the financial impact of transition risks from a macroeconomic view based on forward-looking financial variables at a global or sector level over multiple time horizons.

With flexibility to evaluate different scenario options, and overlay physical risk impacts, insurers can act quickly and confidently to select and make recommendations about the best choice of assumptions and scenarios to match their business profiles.

Credit risk

Moody’s supports “bottom-up” line-by-line assessment of the financial impact from physical and transition risks on credit risk, including commercial real estate, retail mortgages, and loans. These detailed credit risk projections can be aggregated to generate a portfolio view of adjusted probability of default.

03 Catastrophe models

Catastrophe models

Peril-specific insights

Gain a deeper understanding of physical risk’s impact on specific perils.

Comprehensive and flexible parameters

Seamlessly adjust time horizons and Representative Concentration Pathways to capture the effects of different scenarios.

Extensive datasets

Leverage a proprietary industry and economic exposure database for more accurate and effective analyses.

Robust science

Our models are informed by IPCC data for a full range of future physical risk scenarios.

More on Moody’s Forward-Looking Catastrophe Models

Exploring modeling for insurers

Our podcast series is dedicated to understanding the generation, application, and interpretation of physical and transition risk scenarios.

podcast

An introduction to physical and transition risk modeling

Our experts answer key questions such as how do physical and transition risk scenarios differ from the scenarios that institutions normally use? What are the advantages of quantitative scenarios over narrative ones? What are the disadvantages or limitations that people should keep in mind?

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podcast

A closer look at the composition of scenarios

Listen as our panelists discuss the sources of physical risk narratives, physical versus transition risks, NGFS scenarios, and more.

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podcast

What’s new from the NGFS? Limitations and future developments

Our panelists discuss important aspects of NGFS scenarios, including their evolution as well as potential advantages and disadvantages.

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Implications of Southern California wildfires for banks' real estate portfolios

Moody's

During the week of January 6, 2025, there were up to six wildﬁres burning in the greater Los Angeles area. The ﬁres have had a devastating toll in terms of loss of life and property as well as disruption to businesses and communities.

News and views

Translating long-term scenarios to short-term market stresses

This paper discusses the ways standard scenarios, like those produced by the NGFS, can be used to create short-term stresses for financial markets.

article

Jan 15, 2025

Moody's

Uncertainties, stochastic scenarios, and sector impacts

Learn more about the inherent uncertainties associated with science and economics and how they can impact physical and transition risks scenario analysis.

article

Nov 21, 2024

Moody's

Moody’s supports OSFI's SCSE

Physical and transition risk quantification is a fast-developing field. Financial institutions and regulators in many jurisdictions are trying to better understand their exposure to these risks through physical and transition risk scenario analysis.

article

Oct 28, 2024

Moody's

Scenario analysis: Integrating physical and transition risks to find opportunities

Discover how physical and transition risk scenario analysis can identify both risks and opportunities, enhancing business strategy and investments. Learn more about integrating physical and transition risks.

Spotlight on catastrophe risk

Not only are catastrophes becoming increasingly frequent and severe, their impact can trigger a cascade of interconnected risks. Delve into Moody's latest insights on recent catastrophic events.

Learn More

article

Oct 22, 2024

Moody's

Pioneering physical and transition risk management in the APAC insurance sector with Moody's

Explore how Moody's leads physical and transition risk management in APAC insurance with strategic deals, collaborative events, and tailored solutions, addressing local regulatory needs and enhancing resilience.

article

Oct 22, 2024

Moody's

Finnish insurance group Fennia selects Moody’s Solutions

We are pleased to announce that Finnish insurance group Fennia, has selected Moody’s solutions to embed physical and transition risk in their own risk and solvency Assessment (ORSA) and strategic asset allocation (SAA) exercises.

article

Jun 01, 2023

Moody's

The winners and losers of physical risk transition

In the first of this series of six articles, we explore sectoral-level impacts using top-down modeling.

article

Jul 01, 2023

Moody's

Achieving a balanced view of physical and transition risk

In the second of this series of six articles, we explore balancing bottom-up and top-down analysis for strategic asset allocation work, ORSA, and TCFD-related Financial Disclosures reporting.

article

Aug 01, 2023

Moody's

How to choose the right model

In the third of this series of six articles, we explore choosing the right model to support your goals for strategic asset allocation work, ORSA, and TFCD reporting.

article

Aug 31, 2023

Moody's

Expanding beyond the Network for Greening the Financial System (NGFS) — what are we missing?

In the fourth of this series of six articles, we explore ways to broaden your modeling approach and identify missing components in your scenarios to improve interpretation.

article

Oct 01, 2023

Moody's

Analyzing and attributing physical and transition risk impacts on asset returns

In the fifth of this series of six articles, we explore the impact of physical and transition risks on asset returns.

article

Nov 01, 2023

Moody's

Considering physical and transition risk uncertainty in portfolio construction

In the last of this series of six articles, we present a simple case study on accounting for risks in asset allocation procedures.

webinar

Oct 31, 2024

Real-time analytics on extreme weather events for banks, Insights from Hurricane Milton and its impact on CRE

Watch as we explore how we model major extreme weather, with a special focus on Hurricane Milton. Our experts will reveal impacts on commercial real estate exposures and show how proactive risk management can help shield credit portfolios.

Watch now

whitepaper

Sep 01, 2022

Moody's

Life insurer survey: Physical and transition risk modeling in the risk assessment process

Although it is accepted that hysical and transition risk will have to be included in the ORSA and its equivalents, it is unclear how much of it will be qualitative, how much will be quantitative, and the timelines for embedding the risk. One of this survey’s aims is to offer clarity.

Pathways solutions

Our specialized scenario modeling solution helps insurers, asset managers, and pension fund managers to quickly assess physical and transition-related financial impact.

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physical and transition risk models

Moody’s models help you understand, evaluate, and manage your physical and transition risk in multiple regions using a probabilistic modeling approach.

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Commercial Mortgage Metrics

Evaluate financial and physical risks and assess the impact on commercial real estate markets under various scenarios, including current policies, delayed transitions, and Net Zero 2050.

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