EIOPA Consults on Integrating Climate Change into SII Standard Formula
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
Related Links
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
Featured Experts
Paul McCarney
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Brian Robinson
Actuary; risk management specialist; corporate and capital modelling expert
Previous Article
EBA on Application of Product Oversight and Governance ArrangementsRelated Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
