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BLOG. 2 min read

Climate Risk Management Best Practices for Insurers Under Solvency II

Climate risk management in the insurance sector is a necessity, not only as an ethical choice or a marketing expedient but as a profitable investment option and a stringent regulatory requisite.

As part of its broader sustainability agenda, the European Insurance and Occupational Pension Authority (EIOPA) requires undertakings to integrate climate change risks into its governance and risk management systems. Since 2022, climate change materiality assessment and stress scenarios must be reported in the “Own Risk and Solvency Assessment” (ORSA), where insurers are expected to evaluate both transition and physical risks and to adapt their business strategies accordingly.

Transition risk scenarios are meant to measure the potential financial impacts of the transition to a low-carbon economy arising from variations in policy, technology and market dynamics as societies shift towards more sustainable practices. Similarly, physical risk scenarios focus on understanding the potential impacts of physical damages and disruptions associated with climate-related events, such as windstorms, wildfires and floods.

Several methodological choices must be made for a precise assessment, starting with the determination of stress scenarios and the choice of specific metrics to quantify changes in the value of identified assets and their financial impact at the firm’s level. The challenge for firms is to reconcile the long-term dynamics of global warming with the operational ability to estimate financial risks within the company's current business model.

Insurance companies must often cope with scarce data availability and a lack of specific expertise in the field. At the same time, the models are being updated at a swift pace and in line with the most recent research findings. Although regulators advocate a proportionate approach, climate risk assessment may pose serious challenges to large groups as well as smaller players.

SS&C Algorithmics has joined forces with CLIMAFIN, a leader in climate-related financial risk assessment, to enable clients to achieve full compliance, plan for evolving requirements and improve their asset allocation strategy. This strategic partnership creates a flexible and seamless software solution, whereby the climate risk calculation is calibrated on large data pools and the adopted methodology is aligned with EIOPA’s guidance. Moreover, firms can jointly calculate the impact of climate scenarios on market and credit risks in a correlated framework, which improves business decisions. The solution is supported by a team of subject matter experts, including prominent academics, to ensure deep knowledge and support across the entire submission process.

To find out more, contact us.

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