European insurers’ Exposure to physical climate change risk

In 2020, and as part of the sustainability agenda to integrate environmental, social and governance risk assessment in the regulatory and supervisory framework, the European Insurance and Occupational Pensions Authority (EIOPA) published the sensitivity analysis of climate-change related transition risks. This report quantifies potential climate-change related transition risks and presents insights into possible impacts on these investments as economies transition away from fossil fuel-dependent energy production and carbon-intensive production. The EIOPA has now published the Discussion paper on physical climate change risks, which is a follow-up to the report published in 2020.

Executive summary

The EIOPA has published a Discussion paper on physical climate change risks, which objective is to provide an assessment of the European insurance sector’s exposure to climate-related hazards and inform future work in this field. The report also presents and discusses the current trends in underwriting practices that are likely to be affected by climate change.

Main content

This Technical Note summarizes the main aspects of the Discussion Paper:

• Climate change and physical risk. Global warming is causing changes in the insurance sector, affecting the assets and liabilities of insurers. Physical climate change risks may have different impacts on insurance companies depending on their characteristics (e.g., their core underwriting and investment allocation strategies, geographic focus, location, or size). 
• Approach and methodology adopted. The results presented in this report are primarily based on the data collected from large European insurance groups and solo undertakings. The selected sample provides 50% or more coverage at country level for 24 jurisdictions. The data collected refers to: i) year-end 2020 data on sum insured and number of buildings insured or losses among others; ii) historical information on diverse European natural disasters; iii) insurers’ views and expectations for the next 10-20 years on the potential impact of long-term physical risks on their business strategies.
• Main findings of the analysis. Firstly, windstorm is already the most insured peril followed by river flood, wildfire, and coastal flood. On another hand, all property-related line of businesses are expected to be impacted by physical climate change risk. Furthermore, results highlight that the qualitative information collected from participants show that more than 50% of the participants have not undertaken any climate change analyses so far and that many of them had difficulties in providing data to assess the risks that are likely to materialise in the coming years.

Next Steps

• The EIOPA will continue its work with National Competent Authorities (NCA) and the industry to push the sustainable finance agenda forward and continue bringing new results to help prepare the insurance sector for the effects of climate change.