The European Insurance and Occupational Pensions Authority is recommending updates to the way natural catastrophe risks are accounted for in insurers’ standard formula calibrations following a comprehensive reassessment exercise conducted in 2023 and 2024. Drawing on new scientific insights, recent climate data and advanced risk modelling, EIOPA proposes adjusting standard formula risk factors for perils like flood, hail, earthquake and windstorm for certain regions, while also expanding the number of countries considered.
Natural disasters and extreme weather events are increasing across the world due to climate change and so are the losses related to them. To ensure the continued protection of policyholders and the overall stability of the EU’s insurance market amid more erratic and damaging weather patterns, it is important that insurers’ capital requirements for natural catastrophe underwriting risk adequately reflect the impact of natcat events.
Taking into account new insights, data sets and models that have become available since the last update of standard formulate risk weights in 2018, EIOPA has reviewed the existing parameters and is now proposing new factors for 24 regions across natural hazards like floods, windstorms, hail, earthquakes and subsidence.
Summary of the new factors
The reassessment brings the broadest update for flood hazard, where the impact of climate change has been evident in recent years. Three countries’ flood risk factors have been recalibrated to better match the risks insurance companies with underwritten business in these regions face. Seven other countries, including Ireland, Luxembourg and Norway, are being proposed for inclusion in the standard formula for flood risk after their exposures were found to be material.
Likewise, several regions, including Iceland and some of France’s overseas territories, should see their risk factors for windstorm increased while the risk factors of countries like Germany, Belgium and Luxembourg should be bumped up for hail risk. Subsidence risk, or ground sinkage risk, should be raised for France while Belgium should receive a risk factor in standard formula calibrations for this peril.
Monitoring other hazards
In addition to the five risk factors already covered, EIOPA is also closely monitoring emerging perils for a potential inclusion in the standard formula. As the frequency and intensity of certain perils change due to climate change, they may become more relevant for the EU’s insurance sector than they had been in the past. As such, EIOPA is analysing whether natural hazards like wildfire, coastal flood and droughts are material enough to be included in standard formula calibrations.
Next steps
EIOPA has submitted the above proposals to the European Commission. The European Commission will consider EIOPA’s advice for a potential (re)calibration of the relevant standard formula parameters.
Background
The Solvency II Review mandates EIOPA to reassess, and, in case of significant discrepancies, recalibrate natural catastrophe risk parameters at least every five years. EIOPA therefore performs regular recalibrations of these risk, taking the latest data and scientific evidence into account. The proposals included in this Opinion were consulted on before the publication of the final Opinion. See the Consultation here.
This reassessment exercise is part of EIOPA’s broader work related to natural catastrophes, which, among others, includes analyses of insurers’ exposure to physical climate change, EIOPA’s insurance protection gap dashboard for natural catastrophes and the analysis of insurance-based solutions aimed at narrowing Europe’s protection gaps.