Climate stress test
Prudential exercise assessing the resilience of an insurer's or bank's balance sheet to transition and physical climate shocks.
The climate stress test is a prudential exercise by which a supervisor assesses the resilience of a financial institution's balance sheet to climate shock scenarios, transition and physical. Adapted from the logic of classic financial stress tests, it applies trajectories such as the NGFS ones to assets and liabilities to estimate potential losses: write-down of carbon assets, rising catastrophe losses, effects on solvency. European authorities, including EIOPA for insurance and the ECB for banks, have run several such exercises. For the insurer, the climate stress test combines the specificity of a liability sensitive to physical perils and an asset exposed to transition risk, making it a particularly rich case. Its scope remains primarily instructive and exploratory given methodological uncertainties, but it prepares the gradual integration of climate risk into the quantitative prudential framework.
Textbook case: an EIOPA stress test applying a disorderly transition shock reveals the sensitivity of an insurer's assets to an abrupt repricing of carbon assets.
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