Source: NGFS Comprehensive report: "A call for action: Climate change as a source of financial risk."
A specific climate risk scenario can be defined at different levels of detail, and the level of granularity chosen will be a key consideration. EIOPA will need to decide on the level of granularity for the supervisory stress test definition.
A high-level stress test definition with modelled future pathways of climate-related factors (e.g. temperature change, carbon price) is one option. This would allow flexibility for insurers to translate these to financial and underwriting impacts using their own modelling and judgement.
Another option is that EIOPA could specify the scenarios in greater detail. For example, by specifying granular stress impacts on different sectors, countries or regions. This would take some of the flexibility away from insurers but would result in more comparable results.
The paper outlines EIOPA’s views on the advantages and disadvantages of the various levels of granularity and states that they currently consider the definition of scenarios at economic sector level to be most appropriate, with shocks calibrated at country or regional level where appropriate. This view may be updated in future, in light of feedback on the paper or modelling developments.
The different levels of scenario granularity are summarised in the pyramid below: