European insurers stress risk-based approach to sustainability drive

European insurers strongly support the drive towards sustainability, according to Insurance Europe’s response to a discussion paper by the European Insurance and Occupational Pensions Authority (EIOPA) on the prudential treatment of sustainability risks.

Insurance Europe says in its response that the industry is supportive of EIOPA receiving a mandate from the EC, in the context of the Solvency II 2020 review, to determine if there is evidence, based on available data, to justify a differential prudential treatment of exposures related to environmental, social and governance (ESG) assets or activities.

But the industry suggests being cautious and to avoid taking an overly theoretical and complex approach: “It is important to pursue a risk and evidence-based approach to fulfil the mandate in order to maintain Solvency II’s risk-based nature. EIOPA raises valid, yet challenging-to-answer, questions in the discussion paper, due to the unstable, scarce and not sufficiently standardised data available in this area. In particular, the isolation of the sustainability element from other (non)economic parameters and subjective influences in the constantly changing environment will be ambitious and difficult.”

Insurance Europe goes on: “There are many uncertainties involved and the chosen assumptions and approach will heavily impact the outcomes. Therefore, any results should be interpreted with the necessary caution, and conclusions or actions based on the results should be approached with care. Furthermore, any work in this area should also be proportionate and feasible for smaller, non-complex insurers.”

The insurance organisation stressed the importance of pursuing a risk and evidence-based approach to fulfil the mandate in order to preserve Solvency II’s risk-based nature. Insurers welcome EIOPA’s approach to ensure that the prudential perspective of insurance regulation addresses the influence of sustainability risks underlying the investment and underwriting activities from a risk-based perspective, says Insurance Europe.

The response notes that while ESG comprises a broad spectrum of factors, the discussion paper focuses mainly on the energy infrastructure transition risk from fossil fuels to renewables. Insurance Europe points out there are also other relevant factors such as biodiversity loss, pollution, land use, and water use that often interrelates with climate change and carbon usage.

Insurance Europe says the industry broadly agrees with EIOPA’s stance on how adaptation measures could impact the solvency capital requirement. It notes that climate adaptation measures taken by insurers (such as through advice, incentives and other services to policyholders) or by measures taken by policyholders (such as through concrete construction measures for natural catastrophes), could potentially reduce risks.

It goes on: “In addition to individual adaptation measures by policyholders, the industry suggests including publicly funded climate-related adaptation measures. Public authorities have a significant role to play when it comes to adaptation to climate change and, in turn, in terms of risk reduction. Therefore, the risk factors applied in the standard formula, based on existing evidence, should consider measures such as dikes, retention areas and avoidance of development in flood-prone areas.”

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