Main results of the climate exercise for the insurance sector

The second climate stress-testing exercise was conducted according to a "bottom-up" approach, in which the ACPR provided the main assumptions and scenarios and it was up to the insurers to assess impact on their respective balance sheets. This iteration spurred stronger involvement from the financial sector, as 15 insurance groups participated, comprising 22 entities and accounting for 90% of French insurers’ balance sheet total, to be compared with 75% during the pilot exercise.

The ACPR would like to thank participants for their continued commitment throughout this exercise.

Main findings derived from climate stress-testing results

This climate exercise considers the impacts of climate change by taking into account both physical and transition risks, at long-term horizons (2050), as did the pilot exercise, but also, and for the first time, factoring in a shorter-term horizon (2027), with the aim of measuring the impact of climate change on the solvency of insurance undertakings. Furthermore, this short-term scenario was implemented in advance of the NGFS work, the network of central banks and supervisors for the greening of the financial system.

Short-term scenario

The short-term scenario relies on a sequence of extreme weather events, which are combined and compounded: two consecutive episodes of severe drought in 2023 and 2024, coming after historic drought in 2022, and followed by heavy flooding in southern France in 2025 due to a severe convective storm event, resulting in an embankment dam failure. It is also assumed that this sequence of extreme weather events, which is in line with a trend observed worldwide, strengthens the markets’ conviction that transition policies have become unavoidable. This growing awareness results in sudden market correction and impairment losses on financial assets, especially brown assets and real estate, in keeping with the asset stranding phenomenon. This financial shock also incorporates contagion mechanisms consistent with those observed during previous financial stress events, and affecting the entire portfolio of insurers until 2027. The combined effect of these physical and transition shocks adversely affects the solvency of insurers. The SCR coverage ratio thus went from 230% at end-2022 to 170% at end-2027, a 60-point drop. Financial shocks affect solvency the most, and lead to a 28% decrease in own funds in 2025, compared with a baseline scenario that does not factor in climate change.

Claims in relation to the dam failure and other climate change effects incurred in 2025 result in a 48 point dip in the SCR coverage ratio. This overall impact on solvency is measured under a “static balance-sheet” assumption, under which insurers are not able to implement measures to mitigate the effect of these various shocks.

Long-term scenario

In the long term, it is instead assumed that insurers will have the ability to adapt their business and balance sheet to mitigate the effects of climate change (the “dynamic balance sheet” assumption). As such, the exercise focuses less on the impacts on solvency than on the strategies implemented by insurers. The cost of climate change is measured by comparing a fictional baseline scenario, which does not include physical and transition risks, with two adverse scenarios from the NGFS: one assuming an orderly transition, and the other a disorderly transition, while both factor in an increase in the frequency and magnitude of extreme weather events (drought, flooding and coastal flooding). Another defining feature of the ACPR's analyses is the integration of the impact of climate change on health risks (spread of vector-borne diseases such as dengue fever and chikungunya, air pollution and respiratory diseases, and mortality induced by an increase in the frequency and duration of heatwaves). The analysis of findings shows a 105% increase of total claims in the adverse scenario of a disorderly transition by 2050, compared with 2022, as well as a 42% increase in weather-related claims compared with the baseline scenario. The results also highlight significant geographical disparities, depending on the various types of hazard (drought, submersion and flooding). However, in the course of this stress test, insurers made rather limited use of management action (such as geographical reallocations, or even the termination of policies in the most hazard-prone areas, as well as the restructuring of their balance sheet) to mitigate the impacts of adverse scenarios. According to our findings, between 2022 and 2050, just over half of the deterioration observed in claim costs is attributable to an increase in physical risks, the remainder being due to inflation as well as to an increase in insured values.

For the first time, as part of long-term scenarios, insurers have delved into insurance gap risk both quantitatively and qualitatively. This risk is analysed from a dual perspective: that of the policyholder, who would no longer be able or willing to insure property, given the increase in premiums induced by climate risk; and that of the insurer, for whom the increase in the cost and frequency of extreme weather events would make property uninsurable in certain areas. In their answers to the questionnaire used for this exercise, insurers state that they consider this risk would be highly differentiated according to the location considered, and that they plan to set up in-house policyholder support mechanisms to combat the consequences and costs of climate change.

In terms of investment, in line with the proposed scenarios, assets linked to fossil fuel business and real estate suffer the most significant impairment losses by 2050. However, these effects do not appear to lead participating insurers to reallocate portfolios.

Whether it be in the short term or the longer term, the findings of this second climate stress test show that insurance undertakings are significantly exposed to climate change-related shocks, thus confirming the need for them to promptly integrate these risks in their strategy, their governance and their respective internal models, if applicable.

Insurers must therefore sustain their efforts, first towards fulfilling the commitments they made in 2019 in favour of combating climate change and reaching the carbon neutrality target by 2050, but also towards initiating asset and liability management action to withstand the anticipated consequences of tail risks on their claims and financial assets.