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

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

• Press Release
• Consultation Paper (PDF)
• Feedback Form

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