Risk, Sustainability and Climate Risk Update, Q2 2026
9th July 2026
Paul Davenport
Finance and Risk Director
Welcome to our latest report on key activities and developments within the Risk, Sustainability and Climate Risk areas relevant to the market arising in the second quarter of 2026.
Risk
During Q2, the PRA’s DyGIST exercise was the primary focus of the Chief Risk Officers (CRO) Committee activity and wider LMA risk engagement. The PRA DyGIST exercise was framed as a live “fire drill” rather than a model validation exercise, with the PRA focused on firms’ preparedness, responsiveness and reflection.
In advance of the live phase, the LMA hosted three drop-in sessions for CROs and chief actuaries. These sessions were designed to provide an overview of the PRA and Lloyd’s communications, address member questions and gather views on how the LMA could support members during the live exercise.
During the live phase in May, the PRA issued scenario injects across a three-week live exercise. The scenarios subjected the market to a sequence of severe and compounding systemic shocks, including a global market downturn, systemic cyber event affecting manufacturing operations, Pacific Northwest earthquake and tsunami, North Atlantic hurricane, UK windstorm and reinsurance recovery stress.
The CRO Committee meeting on 07 May provided an early opportunity for members to reflect on the first week of the live phase. Members discussed different approaches to governance, including the use of proxy boards, proxy executive committees, diary-based approaches, daily stand-ups, end-of-day updates and delegated review groups, while avoiding formal board meetings as instructed by the PRA.
The LMA arranged four drop-in sessions during the live phase to support risk and actuarial members by providing a forum to discuss areas of uncertainty arising from the scenario injects and corresponding Lloyd’s templates. These sessions were also used to collate questions for Lloyd’s, where appropriate, thereby supporting the ongoing dialogue between the LMA, managing agents and Lloyd’s during the live exercise.
The live phase concluded on 26 May. Lloyd’s has since allocated in-scope syndicates to either a Core or Enhanced cohort, with Enhanced syndicates subject to fuller PRA and Lloyd’s reporting requirements. The LMA has engaged with Lloyd’s on the post-live reporting requirements, emphasising the need for proportionate, best-efforts reporting, clarity of assumptions and the minimisation of additional reporting burden during a busy period for managing agents.
Lloyd’s reflected on the discussions and has subsequently issued a follow-up email to DyGIST sponsors, with a more detailed guidance note on the recommended approach and assumptions, and also arranged a further market drop-in session to allow syndicates to raise any remaining questions. Lloyd’s explained that the additional information requested reflects the minimum information required by Lloyd’s to run the Lloyd’s Internal Model and assess the impact of the event on central and market solvency.
The LMA will continue to monitor feedback from managing agents and engage with Lloyd’s where additional clarification is needed.
The PRA’s qualitative template is primarily seeking to understand whether firms were able to demonstrate credible governance, decision-making and regulatory engagement under stress, rather than simply explaining their numerical results. Key areas of focus include evidence of strong governance and audit trail, credibility of management actions and business model implications, and readiness to engage with Lloyd’s and the PRA in a timely and transparent way under stress conditions.
Lloyd’s risk and governance oversight
In Q2, the CRO Committee also continued its engagement with Lloyd’s on market oversight, risk governance and the practical operation of Principle 10. Ross McGee, Lloyd’s newly appointed Director of Market Oversight Delivery, joined the May CRO Committee meeting to introduce his role and provide an update on the direction of Lloyd’s oversight delivery. Lloyd’s noted that the Principle 10 oversight team is expanding, with managers and senior associates being recruited to broaden coverage and add commercial market experience. Committee discussion focused on the need for Lloyd’s oversight to be pragmatic and flexible, avoid duplicate information requests, recognise the diverse structures and needs of managing agents, and avoid overburdening managing agents during busy periods.
Lloyd’s also described plans to provide more comprehensive market feedback, not only to Tier 1 agents, and to organise events to share findings and good practice. The committee raised questions around how sub-principles aggregate to top-level assessments and whether there would be greater transparency or changes in approach. Lloyd’s indicated that no immediate changes were planned, but that the team would seek market input before making any adjustments. This aligns with the LMA’s ongoing discussions with Lloyd’s Governance and Risk Oversight team to seek clarity on how Lloyd’s intends to use ORSA documents more effectively as a primary source of information, reduce duplicate requests where relevant information is already available, and clarify its forward approach to risk and governance oversight now that recruitment in this area has progressed.
Geopolitical risk
Geopolitical risk remained a key CRO Committee priority during Q2. The LMA CRO Committee arranged a briefing session with Control Risks in April, followed by a briefing note for members, LMA Control Risks Geopolitical Risk briefing, which summarised key themes and implications for Lloyd’s managing agent risk functions. Control risks framed the global geopolitical context as moving away from rules-based multilateralism towards more interest-driven, transactional and power-state behaviour, with established international institutions increasingly challenged and alternative structures emerging. Key themes included erosion of geopolitical norms, fragmentation of the global order, strategic competition over sovereignty, China’s positioning in alternative multilateralism and declining trust in institutions. For insurers, the note identified greater volatility and lower predictability at the international level.
Control Risks also emphasised organised crime as an increasingly important geopolitical risk channel, with geopolitical instability driving organised crime risk rather than those risks developing independently. A material increase in violent organised crime incidents affecting businesses, hybrid tactics spanning criminal, political and state-linked activity, and the use of sabotage, espionage and infrastructure disruption as part of criminal activity. Sectors identified as particularly exposed included electronic equipment, technology supply chains and pharmaceuticals, with corruption levels highlighted as an important early warning indicator.
CROs were encouraged to avoid the “normalisation trap”, namely the assumption that elevated crime, instability and disruption, are temporary anomalies rather than signs of a structurally higher risk environment. Control Risks emphasised the increasing plausibility of wildcard scenarios, the interaction of geopolitical, climate and technological shocks, second- and third-order effects across sectors, and the need for cross-scenario mapping, event triggers and escalation thresholds within enterprise risk and underwriting frameworks.
An LMA CRO Committee sub-group has come together in Q2 to develop a guide on assessing geopolitical risk. The guide aims to provide a practical geopolitical risk assessment framework and support embedding geopolitical risk into existing enterprise risk management (ERM) and ORSA processes. The intended framework includes pre-event taxonomy and key risk indicators, during-event playbooks for rapid exposure quantification and governance, and ORSA embedding through multi-year conflict scenarios and, where appropriate, reverse stress testing supported by clear board and management roles. The guide will be largely integrated within the Stress & Scenario Testing framework, currently produced by the LMA Risk Next Generation Committee – please refer to the section below.
Supply chain risk
CRO Committee members also supported London Risk Week through participation in a joint Lloyd’s Operational risk/LMA Operations roundtable on supply-chain risk. The discussion highlighted supply-chain disruption as an increasingly persistent driver of market volatility, with implications for inflation, business continuity and the resilience of critical sectors. Participants emphasised that supply-chain disruption should be viewed not only as an operational issue but as a structural, cross-cutting risk with longer-term consequences, including second- and third-order impacts that may not be fully captured in existing modelling approaches. The discussion also highlighted the need for earlier recognition of slow burn disruptions, stronger risk visibility across supply chains, and continued balance between resilience, underwriting discipline and the ability to capture opportunities in a more volatile environment.
Lloyd’s Q2 Market Message
The LMA also shared a summary of Lloyd’s Q2 Market Message with CROs, highlighting a shift towards a softening market environment and a renewed emphasis on underwriting discipline. Lloyd’s emphasised stronger focus on expense discipline, cycle management and portfolio optimisation, alongside greater scrutiny of assumptions underpinning loss ratios, inflation and capital setting.
Stress and scenario testing (SST)
Risk Next Generation Committee
The Risk Next Generation Committee’s stress and scenario testing workstream is approaching conclusion. The workstream is finalising a proposed framework intended to support risk functions with a practical approach to using stress and scenario tests to guide decision-making and provide insight to key stakeholders and decision-makers. The core message is as follows: stress and scenario tests are most effective when they connect risk insight to decisions around capital, underwriting, reinsurance and strategy. It will be presented at the CRO committee for approval in either July or September and will be then circulated to all CROs.
The proposed framework recognises that SSTs already have a number of established uses in regulatory and market practice, including capital and solvency assessment as part of ORSA, reverse stress testing, risk appetite and tolerance calibration, exposure management, reinsurance purchasing, pricing and underwriting challenge, liquidity and investment stresses, and model validation. The framework also asks how SSTs can be enhanced in the context of more dynamic and uncertain risks and therefore focuses on two case studies: geopolitical risk, due to elevated uncertainty and the growing importance of second-order impacts; and climate risk, due to PRA supervisory expectations and the increasing need to embed materiality assessments into business decision-making.
The draft framework proposes a taxonomy that starts with identification of risk themes, considers known and unknown risks, defines the purpose of the test, determines risk coverage, supports design and calibration and then focuses on the key “so what” question: what quantitative or qualitative outputs are produced, what management actions arise and how the exercise informs decision-making.
Risk culture and AI
The Risk Next Generation Committee has finalised risk culture guidance for managing agents, covering definitions, dimensions and challenges of measuring risk culture and linking risk culture to governance, decision-making and accountability. This will be presented to the July CRO Committee before wider circulation later in July.
AI and agentic AI also remain on the CRO Committee agenda following publication of the LMA’s AI Governance Framework, with AI liability risk identified as a key consideration for future committee discussions.
Risk talent and function benchmarking
Talent remains a key CRO Committee priority for 2026. Building on the Q1 update, the LMA is now preparing to launch a market-wide benchmarking survey of risk functions, in partnership with Teneo, to support a more structured and data-led understanding of how risk capabilities are evolving across the Lloyd’s market.
Enhanced underwriting and second line oversight
The May CRO Committee discussed the scope and approach for the project, which is intended to consider how managing agents’ risk management frameworks should evolve to support an effective and credible second line of defence for emerging or novel enhanced underwriting proposition risks. The committee discussed how enhanced underwriting models fit within ERM and risk management frameworks and agreed to engage an external party to deliver this project, with the CRO Committee and LMA remaining closely involved in shaping and overseeing delivery. Delivery will kick-off after the summer, most likely in September.
The LMA continues to provide periodic updates to the LMA Legal & Regulatory Radar.
Sustainability and Climate Risk
PRA SS5/25 implementation and gap analysis
During Q2, the Climate Risk Working Group (CRWG) continued its focus on supporting managing agents with implementation of PRA SS5/25, with particular emphasis on gap analysis submissions and practical approaches to demonstrating compliance. At the June CRWG meeting, members shared their approaches to the gap analysis submissions, including sequencing of materiality assessments, development of internal roadmaps and action plans, and approaches to Board engagement. There was a clear divergence in sequencing, with some firms completing materiality assessments ahead of gap analysis, while others are using gap analysis as the starting point and embedding materiality as a first-stage deliverable.
Climate materiality assessment – survey results and emerging practice
In June, the CRWG shared the results of its market-wide climate materiality survey, providing a benchmark of current practices across managing agents. The survey findings indicate that the market is actively engaging with climate-related risk, with the strongest progress seen in physical risk assessment and in embedding climate considerations within existing governance and ERM frameworks.
A key structural theme is that firms are avoiding standalone climate frameworks and instead integrating climate-related risks as cross-cutting drivers within existing prudential risk categories. The Risk Function typically retains primary ownership of materiality assessments, with financial impact acting as the main lens, supported by a combination of quantitative thresholds and qualitative judgement.
The survey also highlights a clear maturity gap across risk types. Physical risk is relatively well developed, supported by established catastrophe modelling capabilities, whereas transition and litigation risks remain less mature due to data limitations and a lack of historical benchmarks. In these areas, firms are relying more heavily on qualitative approaches, sector screening and expert judgement to assess potential impact.
A further finding is that climate scenario analysis is widely undertaken but is not yet consistently viewed as decision-useful, particularly in the context of short-term business planning. The results indicate a structural challenge in translating long-term climate pathways into actionable insights for underwriting, capital and strategy decisions within typical planning horizons.
Overall, the survey reinforces that there is no single expected outcome on materiality. Rather, the focus is on ensuring that firms can demonstrate a clear, proportionate and well-governed approach to identifying climate-related risks, assessing potential materiality and escalating the outcomes into management and Board decision-making where appropriate.
If you have any questions, or did not receive the survey results, please contact Alex Koukoudis for a copy of the survey results.
Climate Scenario Analysis (CSA) – market initiative and next steps
Building on the Q1 focus on climate scenario analysis as a key deliverable, the CRWG formally launched a market-wide initiative in June to support managing agents in meeting PRA SS5/25 expectations. On 11 June, a webinar hosted by David Carlin and Alex Koukoudis introduced the initiative, setting out the objectives, PRA expectations and the role of CSA in supporting governance, decision-making and risk management processes.
The initiative is focused on developing a practical CSA playbook for the market, bringing together member perspectives on where scenario analysis is already informing underwriting, pricing, capital management and strategic decision-making, and where further progress is needed to enhance decision-usefulness. The webinar recording and slides are available here.
Climate risk workstream – continued focus areas
Alongside these activities, the CRWG continues to monitor broader areas of climate risk, including the interaction between climate risk and geopolitical developments, and is engaging with Lloyd’s and external stakeholders to understand future regulatory and supervisory developments.
Sustainability Committee repositioning and engagement with CUO Committee
Following the committee repositioning discussion highlighted in our Q1 update, the LMA Sustainability Committee has focused on translating its proposed direction into a more structured engagement with the LMA Chief Underwriting Officer Committee (CUOC). During Q2, the LMA Sustainability committee developed a discussion paper, which was presented to the CUOC to outline how sustainability considerations intersect with underwriting strategy and to propose areas for closer collaboration.
The CUOC discussion was supportive of this direction and confirmed that the Sustainability Committee should continue to operate as a standalone committee, while strengthening its engagement with the CUOC where there is clear underwriting relevance. There was strong interest in increasing collaboration on topics such as the intersection of AI and sustainability, especially in the context of emerging sustainability considerations linked to data centres, clients’ transition plans and the importance of sustainability-related data in underwriting decision-making.
The CUOC also welcomed the Sustainability Committee’s approach to engaging with brokers and other market participants, recognising the value of bringing together market perspectives to support more informed underwriting decisions.
Insurability and external market engagement
Throughout the first half of the year, the LMA’s Alex Koukoudis and Sustainability Committee members also supported the development of the ClimateWise Insurability Readiness Matrix (‘the Matrix’), contributing as part of the advisory group. The Matrix is designed as a structured diagnostic and engagement tool. It achieves this by evaluating insurability across seven critical components: Data and Modelling, Physical Resilience, Policy Alignment, Market Capital and Capacity, Stakeholder Awareness and Financial Literacy, Accessibility and Affordability, and Recovery Ecosystem.
It evaluates insurability by assigning each of its seven core components a traffic-light status. Crucially, these ratings are accompanied by a forward-looking trend signal, indicating whether the risk is improving, stable or declining, and specific “Pathways to Green” that map out the targeted interventions and key stakeholders required to restore or maintain coverage.
The primary users of the Matrix are insurers and reinsurers who draw on their underwriting knowledge and available data to complete the assessment. The aim of the matrix is to support a more consistent dialogue between insurers, clients and policymakers on resilience and adaptation.
Our involvement in the development of the ClimateWise insurability readiness matrix aligns closely with the LMA Sustainability Committee’s focus on insurability, protection gaps and long-term market sustainability, and provides a practical tool to support underwriting judgement and market-level discussion.
Members interested in exploring the framework further are encouraged to download the report and supporting guidance from the ClimateWise website.
The minutes of all committee meetings are available below (member login required):
- Chief Risk Officers’ Committee
- Risk Next Generation Committee
- Sustainability Committee
- Climate Risk Working Group
Please get it touch to find out more or if you have queries on the matters in this update or in the minutes.
Paul Davenport
Finance and Risk Director
paul.davenport@lmalloyds.com
