The 2023 ACPR exercise includes a short-term scenario affecting mainland France, involving a sequence of acute physical risk impacts followed by a financial market shock. This scenario assesses the sensitivity of insurers’ current portfolios to extreme events and allows insurers to see how events might unravel over their strategic planning and ORSA timeline. It also acts as a test of solvency under extreme conditions. The impact of the stress will be measured against the baseline scenario.
The sequence of events is described by ACPR as hypothetical and as extreme, but plausible. During 2023 and 2024, the drought and heatwave events that occurred in Europe in 2022 are assumed to repeat. The first quarter of 2025 sees heavy rainfall and elevated temperatures, accelerating snowmelt. This results in a historic flood in the Durance River, causing the Serre-Ponçon dam to burst and leading to a wave of high water flooding the downstream region in Q1 2025.
The occurrence of this sequence of events – affecting life, infrastructure, and property – is assumed to lead to heightened market awareness of climate risk and the swift announcement of strict carbon regulations in many major economies. This creates a market shock since markets had not taken adequate account of climate risk, leading to a significant loss in the value of assets sensitive to transition risk in Q2 and Q3 of 2025. Contagion and generalised uncertainty mean that spread shocks affect all sectors and equity values plummet. Markets are assumed to stabilise by Q4 2027 but at lower levels compared to 2024, pre-shock. This is expected to have a disinflationary impact on the Euro area.
Insurers are asked to project the short-term scenario using a static balance sheet assumption, meaning that the balance sheet at year-end 2022 is projected forward without changes for management actions to adapt the insurer’s liability portfolio and investments. For projection years 2023 and 2024, insurers are asked to set their liability assumptions in line with their observed loss experience from 2022 for non-life insurance and to use the AON mortality and healthcare costs data from 2022 for life and health insurance. For the impact of the dam burst in Q1 2025, AON provides mortality assumptions at a department level and the CCR provides non-life sector loss experience assumptions.
Short-term stress financial assumptions are derived by ACPR in conjunction with Banque de France teams using the same methodologies as used for the long-term assumptions. Assumptions are provided for each year, from 2023 to 2027, including projections of sector-specific stock market index performance and credit spreads, and sovereign interest rates. These are provided for France, the Euro area, USA, and Japan. The sectoral breakdown uses 12 grouped NACE sectors for both credit spreads and equities. Financial assumptions for a short-term baseline scenario are also provided. These were derived from the 5-year GDP and inflation trajectories in the long-term NIESR baseline scenario for each country or economic area.
The following illustrations show the projected short-term impacts on credit spreads and Euro area GDP and inflation from the ACPR paper.