Climate Risk9 min read

EIOPA Climate Stress Testing for Insurers

By Jonas Adam Mohamed Osman, known as Yonas Osman

CEO of Quantica Risk

60 Rue François Ier, 75008 Paris, France

Published 15 October 2026

EIOPA's climate stress testing framework for insurers tests solvency and liquidity under physical and transition scenarios; here is what it demands in practice.

Executive answer

EIOPA's climate stress testing exercises ask insurers to demonstrate how both assets and liabilities respond to physical and transition climate scenarios, going beyond a simple market risk shock applied to investment portfolios. The exercises typically combine macro-financial scenarios, often aligned with NGFS pathways, with insurance-specific elements such as catastrophe loss escalation on the underwriting side and asset repricing on the investment side.

For insurers, the exercise is as much about process maturity as about the numerical result, since EIOPA and national supervisors look closely at whether firms can produce the required data, justify their scenario translation choices, and explain divergence from peers. Firms treating the exercise purely as a reporting obligation tend to generate results that are difficult to defend under supervisory challenge.

Scenario design and double materiality

The scenarios used combine a top-down macroeconomic narrative, typically NGFS-aligned pathways such as orderly transition, disorderly transition, and hot-house world, with bottom-up insurance-specific shocks. On the liability side, this means reassessing catastrophe model outputs under intensified hazard assumptions for lines like property and agricultural insurance, while on the asset side it means revaluing bond and equity holdings under transition-driven repricing of carbon-intensive sectors.

A key feature of insurance climate stress testing, distinct from banking exercises, is the double materiality angle: climate change affects both what insurers hold on their balance sheet and what they are obligated to pay out under existing and renewing policies. This dual exposure means correlation between asset losses and liability increases in a severe scenario deserves explicit attention rather than being modelled as independent shocks.

Operational and data challenges

Many insurers struggle to produce look-through asset data at the granularity needed for transition risk scenarios, particularly for holdings in funds or private assets where issuer-level emissions and sector data are not readily available. EIOPA's guidance acknowledges these limitations but still expects firms to use best-available proxies and to disclose the extent of estimation involved.

On the underwriting side, catastrophe models calibrated to historical loss experience may understate future losses under climate change, so supervisors increasingly expect insurers to apply explicit adjustments or sensitivity scenarios on top of standard catastrophe model output, particularly for property and agricultural lines where climate sensitivity is highest.

From stress test to business decisions

The value of these exercises comes from feeding results back into underwriting strategy, reinsurance purchasing, and investment allocation rather than treating the stress test as a standalone regulatory submission. Insurers that identify concentrated exposure to a particular peril or sector under a stress scenario should be able to show how that insight changed pricing, capacity allocation, or reinsurance structure in subsequent cycles.

Solvency II's Own Risk and Solvency Assessment process is the natural home for embedding climate stress testing insights, since it requires forward-looking assessment of capital adequacy under plausible adverse scenarios. Firms that integrate EIOPA-style climate scenarios into their ORSA produce a more coherent capital narrative than those running climate stress testing as a parallel, disconnected exercise.

Conclusion

EIOPA's climate stress testing framework is pushing insurers toward genuinely integrated risk management, where physical and transition scenarios touch both sides of the balance sheet and feed into capital and strategic decisions. The exercises will keep evolving as data quality improves, and insurers that invest now in look-through data and catastrophe model adjustments will find each successive round less burdensome.

Yonas Osman, CEO of Quantica Risk, views these exercises as a useful forcing function for insurers to confront correlated asset-liability exposure to climate shocks rather than a compliance box to tick.

Primary sources

EIOPAstress testinginsurancesolvency II