Actuaries and risk managers will play a crucial role in assessing the impact of climate change risk on the balance sheet of insurers and pension funds.

Scenario analysis is a well-established tool that can be used to gain a better understanding of the impact of climate-related risks, and multiple papers have been published on the subject in recent years. The purpose of this document is to provide practical guidance on constructing climate change scenarios and applying long-term scenario analysis in climate risk assessments for insurers and pension funds. This can be used by actuaries and risk managers to analyse the potential short-term and long-term impact on their entity.

The key steps in constructing climate risk scenarios are as follows:

1. Select and describe relevant climate scenarios. Here, a distinction is made between physical risks (which can either have an acute or chronic effect) and transition risks. Examples of these scenarios are a disorderly transition or a hot-house world.
   
   Our recommendation to insurers and pension funds in the Dutch/European market is to disclose at least the following two NGFS scenarios:
   
   Disorderly transition to a 1.5°C world; 
   Current policies scenario, resulting in 3.0°C warming world. 
   
   For the choice of the time horizon, we recommend that a short-term (i.e. 2030) and longterm (i.e. 2050) horizon is considered, and that the liability duration is kept in mind.
   
   
2. The risk exposure for these scenarios should be identified. These risks depend on the entity’s characteristics. We recommend that Dutch insurers and pension funds carefully consider the risks listed in Section 5.
   
   For Dutch insurers and pension funds, its exposure to an increasing water level is a serious threat as a large part of the Netherlands is below sea level. This risk is mitigated as plans for maintenance and improvements of dikes are made for the long term. Further considerations on this risk are given in Sections 2 and 6.
   
   
3. To calculate the financial impacts on the entity based on each scenario, the scenario narratives have to be supplemented with explicit assumptions. Information given in literature or by the regulator on (the quantification of) these assumptions is provided. However, each entity should assess whether these assumptions are relevant to them. This document provides guidance to entities on how to perform this step.