EIOPA outlines approaches to assess the prudential treatment of insurers’ sustainable assets and activities

The European Insurance and Occupational Pensions Authority (EIOPA) published today its 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.

EIOPA is therefore taking a step-by-step approach to assessing whether a dedicated prudential treatment of assets and activities associated with environmental or social objectives under Solvency II 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 discussion paper outlines the intended scope, methodologies and data sources for this 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 welcomes comments on the discussion paper until 5 March 2023. Stakeholders are invited to provide their feedback by responding to the questions in the online survey.

Go to the discussion paper

Next steps

EIOPA follows a risk and evidence-based step-by-step approach in its work in this area. Subsequent to the present discussion paper, EIOPA intends, at a later stage, to consult publicly on empirical findings and potential policy implications.

Background

The discussion paper is one component of EIOPA’s approach to addressing the protection gap - the difference between the amount at risk from climate change and the proportion that is insured.

In the coming days, EIOPA will also publish its natural catastrophe protection gap dashboard and on 7 December will hold its 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,
• and an analysis of the drivers of demand for property insurance.