Climate and sustainability risk assessment in the insurance sector

Climate and sustainability risks are no longer just a sub-category of sustainability themes for insurance companies; they are increasingly having a tangible impact on insurers’ profitability, risk profile, key processes and strategic choices. This development is driven simultaneously by increasing physical climate risks, transition risks, changing regulation and supervisors’ expectations that risk assessments should be genuinely forward-looking rather than based solely on historical data. The Finnish Financial Supervisory Authority has emphasized¹, that the purpose of climate scenarios in the ORSA (Own Risk and Solvency Assessment) is not merely to meet minimum regulatory requirements, but to help insurers understand how climate change affects their business model, strategic choices and risk-bearing capacity over the long term. To date, insurers’ ORSAs have mainly focused on risk assessment over an approximately 3–5 year horizon. The requirement to assess climate risks much further into the future, for example 30–50 years ahead, calls for new ways of thinking, models and approaches.

In non-life insurance in particular, the effects of climate change may be reflected in rising claims costs, increased volatility in claims expenses, changing reinsurance terms, reduced insurability in certain segments, and a need to refine pricing, underwriting policy and product terms. At the same time, in life and unit-linked business, greater emphasis is placed on investment-related transition risks, asset valuation and long-term strategic allocation. According to EIOPA, climate risks should be viewed as both physical and transition risks, and their impacts should be assessed over the short, medium and long term².

A holistic approach to climate and sustainability risks

Insurance companies must consider climate and sustainability risks as part of their overall risk management framework. Climate change affects everything, and climate and sustainability risks have a direct, indirect or secondary connection to all or nearly all of an insurer’s risks. These risks affect, simultaneously, for example insurance risk, market risk, operational risk, liquidity risk, strategic risk and reputational risk. EIOPA’s ORSA guidance and the Finnish Financial Supervisory Authority’s recent supervisory communication emphasize that climate risk analysis should be linked to business planning, risk appetite, board decision-making and, where necessary, the assessment of whether the standard formula used in capital requirement calculations remains appropriate.

In practice, a holistic approach means considering, for example, the following perspectives:

Physical risks: the impact of extreme weather events, floods, storms, heavy rainfall, wildfires or other natural phenomena on claim frequency, claim severity and the regional risk profile of the insurance portfolio.
Transition risks: tightening climate policy, technological disruption, changes in the energy system and shifts in consumer behavior, which may affect the value of investments, the profitability of insured sectors and the company’s long-term strategy.
Indirect and cumulative effects: the impacts of climate change are not limited to individual loss events, but may also become visible more broadly in the insurance market environment. Examples include higher costs or reduced availability of reinsurance protection, changes in customers’ risk behavior, disruptions in supply and repair chains, and selection effects that influence the structure of the insurance portfolio.

Regulatory background

Integrating climate risks into risk management in the insurance sector is no longer merely a matter of good practice; it is increasingly clearly within the scope of regulatory and supervisory expectations. Since 2016, the Solvency II framework has required insurers to consider all material risks in the ORSA. EIOPA’s 2021 Opinion³ on the use of climate change risk scenarios in the ORSA clarified that supervisors should expect insurers to assess material climate risks using scenarios and over the long term. According to the guidance, the analysis should include at least two long-term climate scenarios: one in which global warming remains below 2°C, and another in which it exceeds 2°C.

In 2022, EIOPA published application guidance on conducting climate change materiality assessments and using climate change scenarios in the ORSA⁴. The guidance emphasises that climate risk assessment is not merely a scenario exercise, but part of a broader framework of risk management and strategic leadership. The guidance helps companies identify when climate risk is material, how scenarios can be built, and how the results should be used in decision-making

The regulatory framework was further strengthened when Directive (EU) 2025/2⁵ was published on 8 January 2025 as part of the Solvency II review. The Directive brings climate and sustainability risks more visibly into prudential regulation, including within the ORSA, system of governance, sustainability risk plans and investment strategy considerations. Member States must transpose the changes into national law no later than 30 January 2027. In Finland, this is being implemented through Government Proposal HE 43/2026 vp⁶, which proposes, among other things, new provisions on the management of sustainability risks, clarifications to the ORSA, and the use of climate scenarios in the assessment of material risks.

In addition, Commission Delegated Regulation (EU) 2021/1256⁷, which has applied since 2 August 2022, requires insurance and reinsurance undertakings to integrate sustainability risks into their system of governance. This extends to the risk management system, underwriting and reserving policies, investment processes, actuarial function assessments and remuneration policy. In practice, this means that sustainability risks must be embedded throughout the organization, not only in sustainability reporting or investment activities.

What does this mean in practice for insurance companies?

At a practical level, the challenge for insurers is no longer whether climate risks should be assessed, but how the assessment can be carried out in a way that genuinely supports management. If the analysis remains a purely regulatory exercise, it can easily produce a result that is formally correct but thin from a business perspective. Useful climate scenario work, by contrast, connects materiality assessment, risk metrics, business planning and decision-making. In that case, the focus is not only on transition risks in the investment portfolio, but also on how physical risks, insurance products, reinsurance solutions and customer segments may change over time.

From an insurer’s perspective, this becomes visible in several practical questions:

Business model: in which products, customer segments and geographical areas are climate risks most material? How are climate risks reflected, for example, in the underwriting process?
Risk management: how are climate risks incorporated into the risk taxonomy, risk limits, monitoring reports and support for board decision-making?
Reinsurance: how does changing catastrophe risk affect the price, availability and optimal structure of reinsurance protection? Does the company have the data, information and expertise related to climate risks and their management if reinsurers ask for them?
Product development and underwriting policy: Product development and underwriting policy: are new terms, limitations, deductible structures or incentives for loss prevention and adaptation needed?

Impact on risk assessment, solvency and pricing

Climate risk assessment becomes concrete, among other things, in the ORSA. EIOPA’s application guidance emphasises that climate analysis may influence, for example, the assessment of whether the standard formula remains appropriate or the development of internal models, if climate-related risk drivers materially change the company’s risk profile. Building an internal model requiring supervisory approval is likely to be quite an unlikely option for many companies. Still, some form of internal modelling and/or new types of analysis will be needed. The key point is that insurers take climate risks seriously as part of the ORSA. Concluding that climate risks are minor or immaterial is of course entirely permissible, but this must be based on careful analysis

In pricing, climate risks are likely to appear first indirectly and only later in a more structural way. Initially, the impact may emerge as a need to refine risk classification by region, object or customer group, but in the longer term the question may also be to what extent current insurance policy terms and conditions, deductible structures and incentives related to prevention correspond to the changing level of risk. At the same time, insurers must assess how far risk-based pricing can be tightened without materially weakening the availability of insurance cover in certain segments.

Requirements are also increasing for actuarial function. Delegated Regulation 2021/1256 requires the actuarial function to take sustainability risks into account when assessing underwriting policies and the uncertainty related to the calculation of technical provisions. This may mean, for example, updating trend assumptions and sensitivity analyses so that the impact of climate change is more clearly reflected in technical analysis.

Next steps for insurance companies

Insurance companies should already now build a plan for integrating climate and sustainability risks in a controlled way into the ORSA, risk management, pricing and strategy. In practice, the way forward may include at least the following steps:

Materiality assessment: identify where climate and sustainability risks are genuinely material across business lines, products, investments and value chains.
Scenario framework: select base and stress scenarios relevant to the business, including pathways below 2°C and above 2°C.
Data and methods: develop the capability to combine historical claims data, scientific climate scenarios, geographic data, and vulnerability/adaptation information.
Modelling and decision-making: assess impacts on risk metrics, pricing, reinsurance, product terms and capital adequacy, and link the results to decision-making.
Governance and reporting: define the roles of the board, management, risk management and the actuarial function, and ensure that ORSA reporting is sufficiently precise from a supervisory perspective.

How can we help

At KPMG, we are proud of our sector-specific and technical expertise, as well as our strong commitment to supporting insurance companies in addressing regulatory compliance challenges. Our local team brings extensive experience in ESG risk management and related topics, delivering services that are both practical and of the highest quality. In addition, we work closely with our Nordic and European expert networks to ensure that the latest practical insights and research are effectively applied in our work.

Our service offering includes ESG-related materiality assessments, risk modelling, reporting, and training to support the integration of sustainability risks into business and risk management processes.