A key first step for an insurer is to assess the materiality of climate change risks, and if a risk is deemed to not be material, EIOPA expects a justification of that conclusion. In the context of Solvency II, risks are considered to be material where ignoring the risk could influence the decision-making or the judgement of the users of the information. For ORSA, users could include capital management, strategic or business planning teams, or the Board and supervisory body.
EIOPA suggests a combination of qualitative and quantitative analyses of both the asset and liability exposures in the portfolio. In performing the materiality assessment, the interconnectedness of physical and transition risks should be considered. Insurers should not only consider the current experience but also the future impact of climate change.
In terms of the time horizon, EIOPA expects insurers to consider the long-term, which stretches to many decades for climate change risk. However, the guidance states that the time horizon should be consistent with the insurer’s long-term commitments.
EIOPA suggests the following steps be considered when conducting a materiality assessment: