Proportionality needed in CSRD to manage burden for smaller insurers and captives: GDV

The German Insurance Association (GDV) has called on the EC to ensure the principle of proportionality is properly applied to the forthcoming Corporate Sustainability Reporting Directive (CSRD), which runs the risk of placing an unfair reporting burden on smaller insurers and captives.

The European risk and insurance management community has worked hard over the years to try to ensure that smaller European insurers, such as captives, are not overburdened by rules, including Solvency II, that are aimed mainly at larger insurance groups writing third party business.

Progress has been made for captives because supervisors have been told to apply the proportionality principle, particularly for captives that focus on parent company risks only.

There is a danger, however, that the swathe of corporate due diligence and sustainability reporting rules on the agenda, such as the CSRD, will not recognise the difference between smaller insurers and the big commercial players.

Efforts have been made in recent times to promote the use of captives by European corporations and bolster resilience. The French government has added measures to its latest budget that will help promote the use of these risk management tools.

The failure to apply the principle of proportionality to new reporting and sustainability rules could, however, wipe out the benefits and make captives untenable.

The GDV made this point in its response to the first set of draft European Sustainability Reporting Standards (ESRS), which the European Financial Reporting Advisory Group (EFRAG) submitted to the EC in November last year.

The GDV pointed out that the final text of the CSRD refers to the definition of large undertakings set out in Directive 2013/34/EU on the annual financial statements, consolidated financial statements.

An undertaking is considered large under this directive if it exceeds at least two of the three criteria mentioned below:

• Balance sheet total of €20m;
• Net turnover of €40m;
• Average number of employees during the financial year of 250.

The GDV is concerned about this definition and fears it will spread the net of the CSRD too far. “Based on this definition, even smaller insurance undertakings are considered as large and thereby obliged to full disclosure under the CSRD,” said the association.

“This is due to the specificities of insurance activities, which create steadily high revenues and reserves, and result in large balance sheet totals, even if the undertaking is very small compared to other insurance undertakings. Therefore, EFRAG did not develop any proportional measures for sustainability reporting according to the ESRS by small insurance companies,” it explained.

“A first step to allow for proportionate reporting by small insurers is to allow undertakings that are defined as low-risk profile undertakings (LRPUs), according to the proposals made in the review of the Solvency II directive, to report according to simplified ESRS for small- and medium-sized undertakings,” suggested the GDV.

The problem, however, as the GDV pointed out, is that the Solvency II review still needs to be completed, and there would still be small insurance undertakings not considered LRPUs.

“Following from this, measures by EFRAG and the European Commission are necessary to support small insurance undertakings. Simplifications in particular would be useful to relieve the burden of sustainability reporting for smaller undertakings. Another option could be the development of standardised templates, which could be used by undertakings without being mandatory. Such standardised templates would also provide valuable guidance for smaller companies,” said the GDV.

The GDV is also concerned about requirements within the CSRD to report along the value chain. It fears this could be totally unmanageable for insurers if applied too broadly.

“With regard to reporting along the value chain, taking into consideration the specificities of the insurance industry, it should at least be clarified that the disclosure requirements of the sector-agnostic ESRS do not require a general look-through for all investments, clients and policyholders for all disclosure requirements. Clarification is necessary as long as there is no specification given by the sector-specific ESRS for insurance undertakings. This clarification should be provided by EFRAG with the second set of draft ESRS,” argued the GDV.