The European Insurance and Occupational Pensions Authority (EIOPA) has published for consultation a draft Opinion on the supervision of the use of climate-change risk scenarios in the ORSA. The ORSA is an internal risk management assessment of all the various risks that might impact an insurer’s balance sheet and is a requirement under Solvency II. The draft Opinion forms part of a follow-up to EIOPA’s Opinion of Sustainability within Solvency II, which recommended that (re)insurance undertakings consider climate risks beyond a one-year time horizon. Sustainability and climate risk should be managed through the system of governance, risk-management and the ORSA. EIOPA considered that work needed to be undertaken to define a set of quantitative parameters that could be used in climate change-related scenarios that (re)insurers might use in their ORSA.
The European Commission has proposed a draft Delegated Act amending the Solvency II Delegated Regulation ((EU) 2015/35) specifying that undertakings should integrate sustainability risks in their risk management and ORSA. Following an information request, EIOPA has found that only a small minority of ORSAs assess climate risk using scenario analyses and most firms take a short-term perspective on climate risk. No more than 13% firms made reference to climate risk scenarios in their ORSA, according to EIOPA. Accordingly, the draft Opinion sets out EIOPA’s expectations for the integration of climate change risk scenarios in the ORSA.
The draft Opinion states that firms should take a broad view of climate change risk and should include risks stemming from trends or events caused by climate change. Time horizons should be extended to decades, not years. Authorities should expect firms to have identified material risks in a sufficiently wide range of stress tests or scenario analyses. EIOPA recognises that the development of scenarios, methodologies and modelling will be essential and will evolve over time. After publication of the final Opinion, firms will have two years within which to implement the proposals before EIOPA begins monitoring compliance.
Responses to the consultation are sought by 5 January 2021 using the EU Survey tool. A feedback statement is expected in the Spring.