Analyse et supervision du risque climatique Main results of the climate exercise for the insurance sector

Building on the pilot exercise conducted in 2020-21 , the ACPR conducted a second climate stress test in 2023-24, this time focusing solely on the insurance sector.

In the same way as the first exercise, this stress-testing iteration was prepared within the framework of a marketwide working group led by the ACPR and bringing together major insurance industry players. Preparatory work began at the end of 2021, and discussions continued throughout 2022 to draw key lessons from the first exercise and suggest substantial methodological changes. For instance, the addition of a short-term adverse scenario over a five-year horizon was suggested in order to better align with insurers’ strategic decision-making horizon and assess its consequences in terms of solvency.

The main objectives of this second exercise are defined as follows:
- Strengthening insurers’ ability to anticipate the impacts of climate change and the ecological transition on their business, both in the short-to-medium term and in the long term, as well as their ability to adapt their strategies accordingly.

- Improving the analytical tools available to insurers and supervisors. The assumptions provided are based on more granular data, allowing for a better sectoral and geographical differentiation of risks. The scope of risks considered has also been broadened, taking better account of the macroeconomic and financial consequences of chronic physical risk. This work was carried out in collaboration with insurance undertakings, with the Caisse Centrale de Réassurance (CCR) for the modelling of physical risks on the liabilities side of insurers’ balance sheets, and with AON for the assessment of the health impact of climate risk. This iteration also benefited from the contribution of Banque de France experts in the modelling and quantifying of scenarios.

- Lastly, the stress test aims to explore new dimensions of risk assessment, including: for the short-term scenario, an analysis of the impact of extreme but plausible assumptions on claims, profit and loss, and solvency of insurance undertakings. For long-term scenarios, a quantitative and qualitative analysis of the insurance gap risk and of the prevention of climate change impacts.

The climate-change scenarios and the associated claim scenarios factor in the most recent projections by the IPCC and the NGFS, the network of central banks and supervisors for the greening of the financial system.

The short-term scenario is one of the new features of this exercise, as well as a major step forward. This work is notably being implemented ahead of schedule in relation to NGFS work, on which we rely in other respects. It is based on the assumption of a highly exceptional climate-related loss, causing a sudden, spontaneous correction of financial markets which in turn affects the entire portfolio of insurers through spillover effects.

Two long-term scenarios, derived from the work conducted by the NGFS, capture the economic and financial impacts of two transition paths, one orderly, and the other disorderly and delayed, assorted with a target for global warming containment below 2°C by 2050. They are assessed in terms of deviation from a “fictitious” baseline scenario involving no climate risk. The economic and financial impacts of long-term scenarios affect insurers’ balance sheets, and are combined with an escalation of physical risk, which materialises through natural disaster phenomena (drought, flooding and coastal flooding) and health risks. The physical and transition risk scenarios are therefore consistent with respect to the global warming path to 2050.

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Analyse et supervision du risque climatique Main results of the climate exercise for the insurance sector
  • Published on 05/27/2024
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Updated on: 05/27/2024 17:17