Stress Testing

Support for the 2019 Bank of England insurance stress test

Context

In the speech that he gave to the European Commission on March 21st, 2019, Mark Carney, the governor of the Bank of England, highlighted the need for financial supervisors to conduct climate stress-tests to assess the resilience of their regulated entities to such risks. He called on them to consider the eventuality of a “Climate Minsky moment” – i.e., a sudden materialization of climate risks. When this speech was given, no agreed-upon methodology was yet available to conduct such a stress-test. In response, in 2019, 2DII decided to tackle this issue by developing a methodology that financial supervisors could follow to build ‘late & sudden’ transition scenarios, which could be used as input into either traditional or climate-specific stress-tests of regulated entities.

What we did

2DII developed one of the first climate stress-testing methodologies allowing financial institutions to assess the vulnerabilities of their portfolios to adverse climate change and energy transition scenarios. The methodology is summarized in our April 2019 report, “Storm Ahead: A proposal for a climate stress-test scenario”. This work highly informed the Bank of England’s 2020 climate stress-test for insurance companies, which was launched on June 18th, 2019.

More about the results

The stress-test documentation is available here. UK insurance companies or other organizations wishing to apply the stress-test can now generate stress-test results in combination with a freely available excel tool and the online PACTA scenario analysis software. For information on how 2DII has applied the methodology, please refer to this document here.

The tool uses the breakdown of exposure to different climate relevant sectors to calculate the effect of climate stress on the value of the portfolio. These exposure values can be generated using the PACTA scenario analysis results and fed directly into the Excel based stress test by clicking on participate above and following the instructions. Alternatively, you can directly download the Excel based tool here and use your own portfolio exposure values.

For this website, 2° Investing Initiative uses a stand-alone server, i.e. no other website or information is stored on the server. The server is set up in compliance with the security standards of the German Federal Data Protection Act (BDSG, "Bundesdatenschutzgesetz"), Tele Media Act (TMG, "Telemediengesetz"), and is built on infrastructure that is DIN ISO/IEC 27001 certified. All uploaded data will be deleted after performing the analysis. All analytical results will only be shared (downloadable) exclusively with the respective user of the tool.

If you have any questions about this process or want to find out more about our stress-testing work, please contact us.