The Lloyd’s Market Association and KPMG argue insurers face a reset in how they price and select climate risk.
Their updated Underwriting the Transition report points to a sharp change in transition assumptions over 17 months, with underwriting models now under pressure from both physical climate losses and policy-driven market shifts.
Average global temperatures exceeded 1.5°C over the past year. After COP30 in Belém, consensus tilted toward a higher probability of a disorderly transition. That shift alters scenario planning. It also tightens timelines.
Insurers must manage two moving fronts at once. Physical risks intensify as extreme weather events grow more frequent and severe. Transition risks evolve as governments adjust incentives, disclosure standards and sector targets.
In the UK, the Prudential Regulation Authority requires firms to embed climate risk into governance and risk appetite frameworks by June 2026.
These developments push underwriters to reassess risk selection, pricing and coverage design. Static assumptions won’t hold.
We think portfolios built on orderly transition pathways now require stress testing against more abrupt policy pivots and market dislocation.
Paul Davenport, Finance and Risk Director at the Lloyd’s Market Association, said the market already underwrites transition activity across sectors pursuing decarbonisation and adaptation.
He framed Lloyd’s as a testing ground for emerging risk, with managing agents actively structuring solutions tied to energy transition projects and resilience investment.
Josh Holbrook, Director of Sustainability at KPMG UK, noted the second edition updates sector-level analysis first published in October 2024.
According to KPMG, the pace of change since then demands revised assumptions across industries central to Lloyd’s underwriting base. Opportunity and exposure now sit closer together.
The report identifies four areas where conditions shifted. Energy system dynamics continue to change as capital flows into renewables, storage and grid upgrades.
Artificial intelligence accelerates transition modeling and optimization, yet introduces new systemic risks through energy demand and operational concentration. Adaptation has moved alongside decarbonisation as a board-level priority.
Regulatory and policy changes since late 2024 signal a pivot toward implementation and competitiveness, with major economies tightening disclosure rules and recalibrating sector goals.
According to Beinsure analysts, regulatory compression shortens product development cycles for specialty insurers. Coverage language must evolve quickly when disclosure regimes and subsidy frameworks move.
Davenport argued insurance functions as more than a loss transfer mechanism in this context. Businesses pursuing transition strategies depend on risk capacity to secure financing and execute projects.
Without structured insurance support, capital formation slows and resilience investment stalls.
Holbrook stressed insurers need granular insight into corporate transition pathways. Broad sector assumptions fall short.
Detailed understanding of technology adoption, capital expenditure plans and supply chain exposure shapes underwriting appetite and pricing accuracy.
The LMA and KPMG expect continued volatility in policy direction and market response. They plan to monitor changes in government frameworks, regulation and portfolio composition across Lloyd’s participants.
For underwriters, relevance now depends on speed of adaptation. Competitive position follows.
