EIOPA Sets Out Expectations on Use of Climate Risk Scenarios in ORSA
EIOPA published an opinion to set out its expectations on the supervision of the integration of climate change risk scenarios by insurers in their Own Risk and Solvency Assessment (ORSA). The opinion, which is addressed to national supervisory authorities, states that EIOPA will start monitoring the application of this opinion by the competent authorities two years after its publication. National supervisory authorities should expect insurers to integrate climate change risks in their system of governance, risk-management system, and ORSA. In the ORSA, insurers should do an assessment to identify material climate change risk exposures and subject the material exposures to a risk assessment.
The insurance and reinsurance industry will be impacted by climate change-related physical and transition risks. However, only a minority of insurers assess climate change risks in the ORSA using scenario analysis, usually limited to a short-term time horizon. Therefore, EIOPA considers it essential to foster a forward-looking management of these risks to ensure the long-term solvency and viability of the industry. EIOPA points out that climate change risks should be assessed not only in the short term but also in the long term using scenario analysis to inform the strategic planning and business strategy. Insurers should subject material climate change risks to at least two long-term climate scenarios, where appropriate:
- a climate change risk scenario where the global temperature increase remains below 2°C, preferably no more than 1.5°C, in line with the EU commitments
- a climate change risk scenario where the global temperature increase exceeds 2°C
Insurers are expected to evolve the sophistication of the scenario analyses, taking into account the size, nature, and complexity of their climate change risk exposures. The opinion provides practical guidance on how to select and use climate change scenarios. EIOPA expects national supervisors to collect qualitative and quantitative data to perform a supervisory review of the analysis of short- and long-term climate change risks in the ORSA. Instruments for data collection should be the regular supervisory reporting, most notably the ORSA supervisory report. The opinion follows a risk-based and proportionate approach, recognizing that the approaches to scenario analysis of climate change risk need to evolve over time, as new methodologies become available and undertakings gain experience. Depending on the regulatory developments and the methodological advancements of climate change risk (scenario) analysis, EIOPA may further develop the supervisory expectations put forward in this opinion. EIOPA delivered this opinion on the basis of Solvency II Directive (2009/138/EC), which requires undertakings to consider in their system of governance, risk-management system, and own risk and solvency assessment (ORSA) all risks they face in the short- and long term and to which they are or could be exposed, also when these risks are not (fully) included in the calculation of the Solvency Capital Requirement.
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Keywords: Europe, EU, Insurance, Solvency II, ORSA, Climate Change Risk, Opinion, Reporting, Scenario Analysis, SCR, Stress Testing, EIOPA
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