EIOPA opens debate on prudential treatment of sustainability risks

The European Insurance and Occupational Pensions Authority (Eiopa) has today published a discussion paper on the prudential treatment of sustainability risks and is now seeking comments by stakeholders on the approaches presented. "As long-term investors and society’s risk managers, insurance undertakings have a central role in driving sustainable finance. Since sustainability risks can have material implications on the investment and underwriting activities of insurance undertakings, Eiopa considers it important to ensure that Solvency II – as a risk-based and forward-looking framework – reflects sustainability risks appropriately,” states the European insurance supervisory authority. Eiopa says it is therefore taking a step-by-step approach to assess whether a dedicated prudential treatment of assets and activities associated with environmental or social objectives under Solvency II, Europe’s capital adequacy and reporting regime, would be warranted. The European Commission’s proposals for the Solvency II Directive include a mandate for Eiopa to produce a report in this area. The EC said in September 2021 that the regime needed to be reviewed and updated after five years of being in place. It said the directive needed to be updated to achieve the following key goals: Provide incentives for insurers to contribute to the long-term sustainable financing of the economy Improve risk-sensitivity Mitigate excessive short-term volatility in insurers’ solvency positions Enhance quality, consistency and coordination of insurance supervision across the EU, and improve protection of policyholders and beneficiaries, including when their insurer fails Better address the potential buildup of systemic risk in the insurance sector. Eiopa’s latest discussion paper on the prudential treatment of sustainability risks outlines the intended scope, methodologies and data sources for its assessment exercise and focuses on three distinct areas of analysis: Assets and transition risk exposures: This first area concerns insurers’ investments and proposes ways to assess how risks stemming from the transition to a less carbon-intensive economy could potentially impact prudential risks related to stocks, bonds and real estate. Underwriting risk and climate change adaptation: The second area of analysis focuses on non-life insurance and examines the potential effect of climate-related adaptation measures on underwriting risk and related loss exposures from a prudential perspective. Social risks and objectives: The third area discusses how social risks or harm to social objectives could translate into prudential risks and assesses their corresponding prudential treatment in the requirements on governance, risk management as well as reporting and disclosure. Eiopa says that it welcomes comments on the discussion paper until 5 March 2023. It adds that the discussion paper is one component of Eiopa’s overall approach to addressing the protection gap – the difference between the amount at risk from climate change and the proportion that is insured. The authority says it will soon publish its natural catastrophe protection gap dashboard and on 7 December 7 will hold a conference on sustainable finance. Subsequent publications will focus on: The macro-prudential impact of the protection gap 'Impact underwriting': whether adaptation measures can help in increasing the supply of insurance The reassessment of the natural catastrophe risk capital charges An analysis of the drivers of demand for property insurance.

EIOPA opens debate on prudential treatment of sustainability risks

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Want to read this article?

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