Climate scenarios in the ORSA
A European supervisory expectation that an insurer test its material climate risks, within its own risk and solvency assessment, against at least two long-term scenarios.
The ORSA is the insurer's own assessment of its risks and solvency needs, usually over three to five years. Climate risk fits poorly into it: its heaviest effects arrive beyond that horizon, and a three-year business plan can ignore them without any visible error. The European response is to require a materiality assessment first and then, for exposures found material, a long-term scenario analysis that informs strategy without setting additional capital. The first scenario assumes warming held below 2°C, preferably 1.5°C, which mainly reveals transition risk; the second assumes higher warming, which mainly reveals physical risk. The supervisor judges the quality of the reasoning, not a number.
In its opinion of April 19, 2021, addressed to national supervisors, EIOPA found that no more than 13% of undertakings were then capturing climate risk in their ORSA, and asked that material risks be tested against at least two long-term scenarios, one below 2°C and the other with higher warming.
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