Featured Product

    EIOPA Consults on Supervision of Use of Climate Risk Scenarios in ORSA

    October 05, 2020

    EIOPA is consulting on a draft opinion that sets out its expectations, for the national competent authorities, on the supervision of the integration of climate change scenarios by insurers in the Own Risk and Solvency Assessment (ORSA). Supervisors should apply a risk-based and proportionate approach to supervision and should expect insurers to subject material climate change risks to at least two long-term climate scenarios. The Opinion also provides practical guidance on the selection and implementation of scenarios. The comment period on the consultation paper ends on January 05, 2021. EIOPA will consider the feedback received and expects to publish the final opinion in the Spring of 2021, along with a feedback statement on the consultation responses.

    The consultation is a follow-up to last year’s opinion on sustainability within Solvency II, which recommended that insurers and reinsurers should consider climate risks beyond the one-year time horizon—through the system of governance, risk-management system, and the ORSA. As per EIOPA, supervisors should should expect insurers to subject material climate change risks to at least two long-term climate scenarios: a scenario where the global temperature increase remains below 2°C, preferably no more than 1.5°C in line with the EU commitments, and a scenario where the global temperature increase exceeds 2°C. The EIOPA consultation covers the following areas: 

    • Integration of climate change risk in ORSA in the short and long term—Competent authorities should require undertakings to integrate climate change risks in their system of governance, risk-management system, and ORSA, in line with the Solvency II legislation, guidelines, and opinion on sustainability within Solvency II. Competent authorities should expect undertakings to assess climate change risk in the short term and in the long term, using scenario analysis to inform the strategic planning and business strategy. 
    • Definition of climate change risk—Competent authorities should expect undertakings to take a broad view of climate change risk, including all risks stemming from trends or events caused by climate change. The drivers of climate change risk (transition and physical risks) can be translated into traditional prudential risk categories, namely underwriting risk, market risk, credit and counterparty risks, operational risk, reputational risk, and strategic risk. Such a mapping with illustrative examples of transition and physical risks is included in Annex 3 for non-life insurance and in Annex 4 for life insurance, including health insurance.
    • Materiality assessment of climate change risks—Competent authorities should expect undertakings to identify the materiality of exposures to climate change risks through a combination of qualitative and quantitative analyses. A qualitative analysis could provide insight in the relevance of the main drivers of climate change risk in terms of traditional prudential risks. A quantitative analysis could be used to assess the exposure of assets and underwriting portfolios to transition risk and physical risks.
    • Range of climate change risk scenarios—Competent authorities should expect undertakings, where appropriate, to subject the identified material risks to a sufficiently wide range of stress tests or scenario analyses, including the material short and long-term risks associated with climate change. In line with the EC guidelines on non-financial reporting, competent authorities should expect insurers to subject material climate change risks to at least two long-term climate scenarios, where appropriate. Two scenarios would also allow undertakings to define a reference scenario against which the other scenario could be compared.
    • Evolution of climate change risk analysis—Competent authorities should expect that the scope, depth, and methodologies of undertakings’ quantitative (scenario) analysis of climate change risk evolve, as modeling approaches advance and undertakings gain more experience. 
    • Supervisory reporting and consistent disclosures—Competent authorities should expect undertakings to present and explain in the ORSA supervisory report the analysis of short- and long-term climate change risks. Competent authorities should encourage larger undertakings to disclose climate-related information, in line with the EC guidelines on non-financial reporting on climate-related information under the Non-Financial Reporting Directive or NFRD. Competent authorities should expect that the information related to climate change risk contained in the ORSA supervisory report is consistent with the undertakings’ public disclosure of climate-related information under the Non-Financial Reporting Directive.

    Competent authorities should collect qualitative and quantitative data enabling them to perform supervisory review of the analysis of short- and long-term climate change risks in ORSA, in accordance with this draft opinion. Data should be collected through the regular supervisory reporting, most notably the ORSA supervisory report. EIOPA will start monitoring the application of the opinion by the competent authorities two years after its publication. 

     

    Related Links

    Comment Due Date: January 05, 2021

    Keywords: Europe, EU, Insurance, Reinsurance, Solvency II, Climate Change Risk, ESG, ORSA, Proportionality, Stress Testing, Scenario Analysis, NFRD, Reporting, Disclosures, EIOPA

    Featured Experts
    Related Articles
    News

    ESAs Publish Reporting Templates for Financial Conglomerates

    ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.

    January 18, 2021 WebPage Regulatory News
    News

    EBA Publishes Report on Asset Encumbrance of Banks in EU

    EBA published the annual report on asset encumbrance of banks in EU.

    January 18, 2021 WebPage Regulatory News
    News

    US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C

    FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.

    January 15, 2021 WebPage Regulatory News
    News

    EBA Proposes Guidelines for Establishing Intermediate Parent Entities

    EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.

    January 15, 2021 WebPage Regulatory News
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Issues Erratum for Technical Package on Reporting Framework 3.0

    EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.

    January 14, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets

    APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.

    January 14, 2021 WebPage Regulatory News
    News

    ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans

    ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.

    January 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6450