EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk. To ensure the financial resilience of insurers and reinsurers covering natural catastrophes, the solvency capital requirement (SCR) for natural catastrophe underwriting risk needs to remain appropriate in light of climate change. To this end, EIOPA is proposing possible methodological steps and process changes to integrate climate change in the calculation of natural catastrophe risk SCR calibration. Comments on the discussion paper are due by February 26, 2021, post which EIOPA expects to consider the feedback received and to publish the final report in the Summer of 2021.
This discussion paper is a follow-up to the opinion on sustainability within Solvency II, which EIOPA published in September 2019; the opinion concluded that there is a need to consider if, and how, climate change-related perils could be better captured in the Solvency II framework under the natural catastrophe risk submodule. In this discussion paper, EIOPA proposes the following possible methodological steps to include climate change in the natural catastrophe SCR Calibration:
- Use natural catastrophe models that explicitly consider climate change to recalibrate the natural catastrophe standard formula parameters
- Assess whether new countries should be added to the countries currently covered by the standard formula
- Assess the need to include new perils to the perils currently covered by the standard formula
- Asses the need to include other insurance activities to the ones currently covered by the standard formula
- Add a loading factor for specific perils or regions
- Capture climate change in the spatial and peril correlation
As part of the process changes to include climate change in the natural catastrophe SCR calibration, EIOPA proposes to formalize an approach to re-assess current natural catastrophe SCR parameters on a regular basis and to perform regular calibrations. The reassessment would need to consider parameters such as new legislation, evidence-based requests from stakeholders for the recalibration of a certain peril or region, changes in national insurance schemes (new pools for example), and inadequate loss ratio (which might not directly link to climate change but still have important consequences). Every 3 to 5 years experts from national competent authorities, natural catastrophe insurance, natural catastrophe modelers, and climatologists would reassess the parameters for all perils or regions in the standard formula and stress the potential need for a recalibration of certain perils or regions. For this, the following criteria could be considered:
- Model changes due to climate change or other reasons
- New scientific evidence on climate change
- Changes in exposure and/or vulnerability
- Materiality of the change
- New insurance products
Comment Due Date: February 26, 2021
Keywords: Europe, EU, Insurance, Solvency II, Climate Change Risk, ESG, Sustainable Finance, SCR, Solvency Capital Requirement, Catastrophe Risk, EIOPA
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