03.4 Strategy resilience, stress tests and climate scenario analysis 01 Introduction and strategy 02 Measuring and managing sustainability 03 Climate change related disclosure 04 Strengthening our foundation 05 Our universal principles Assessments were performed in a workshop format with various participants from local P&C underwriting, pricing and claims areas. Results The following provides a summary of results from the local OE assessments. Transition risks under the different scenarios can be further differentiated into three sub-categories: policy, technological and consumer preferences. All three will weigh on future premium growth and profitability in retail motor. Higher carbon prices in the ‘Divergent Net- Zero scenario’, for example, will translate into higher mobility costs. At the same time, we anticipate that significant public investments in public transport should increase the attractiveness, and thereby usage, of this means of transport. Consumers will react to these shifts by reducing car ownership and individual mobility. While modest in the short- to mid-term, these trends are likely to accelerate after 2030, translating into a negative outlook on business volumes in the long-run. Survey respondents also confirmed that technological change will be a main driver for declining profits in motor retail business due to higher loss ratios. Although claims frequency might decline thanks to better technologies, this is more than offset by an increase in severity, meaning higher costs for repairs and spare parts. Over the long-term these developments should be reflected in pricing, such that the adverse technological impacts will become increasingly less material before ultimately achieving a state of neutral impact. In this respect, differences in survey responses reflect how advanced respondents see themselves with respect to insuring EVs, among other factors. Physical risks like extreme weather events are assessed as having only a minor impact on claims in the motor business in the ‘Divergent Net-Zero scenario’. While the ‘Divergent Net-Zero’ scenario is expected to have a clearly negative impact on the retail motor business the story is different for retail property, where the survey revealed mixed views. Here, an overall positive impact is expected, in particular for top-line growth, i.e. Gross Written Premium. The main drivers are new standards for buildings (the policy aspect of transition risks), which require corresponding insurance cover and offer new opportunities, but also increasing demand due to growing risk awareness, especially in markets with lower insurance penetration. Furthermore, increased natural catastrophes (NatCat)risks are likely to lead to a greater level of risk aversion or consumer desire for protection, which in turn will translate into higher premiums. On the profitability side, the picture is more nuanced. More extreme weather events will lead to rising claims, but pricing and portfolio steering should be able to neutralize the impact on the bottom line. In this context, technical excellence was seen as a strong competitive advantage over the short- to mid-term by one respondent, supporting a rather positive view on profitability. For other respondents, however, higher claims associated with new building materials and technology as well as limitations around pricing adjustments (e.g. tacit renewals) lead to the assessment of a neutral or even negative impact on profitability. These differences in the assessments disappear over the long-term, where pricing is expected to be adapted, but serve to highlight the different market characteristics as well as the degree of uncertainty and divergent views on risk development, even amongst subject matter experts. Turning to the scenario ‘Current Policies’, the assessments are mostly similar, albeit with transition impacts being viewed as generally less severe, especially over the short- to mid-term time horizon. As policies stay more or less unchanged, the trends of less individual mobility and more climate-efficient buildings will unfold more slowly. Therefore, the qualitative risk assessment expects almost no net change in the business environment until 2030. Only after this will the full impact of these trends be felt. Mixed views prevail for retail motor, where survey respondents weigh the various impacts from market growth, increasing physical risks and competition very differently. For retail property, most respondents assessed negative impacts on profitability from increasing physical risks and competition over the short- to mid-term, which served as the primary driver for the overall assessment result. Over the long-term, this is further aggravated by potential issues around insurability, reinsurance capacity and government intervention preventing proper price adjustments, with the exception of one response, which assigns a higher weight to increasing demand and acceptance of risk based pricing. Allianz Group Sustainability Report 2022 108