On 7 November 2024, EIOPA issued its Report on the Prudential Treatment of Sustainability Risks, which assesses the potential for a dedicated prudential treatment of assets or activities associated substantially with environmental or social objectives, or with harm to such objectives.
On 7 November 2024, the European Insurance and Pensions Authority (EIOPA) issued its Report on the Prudential Treatment of Sustainability Risks (Report), which assesses the potential for a dedicated prudential treatment of assets or activities associated substantially with environmental or social objectives, or with harm to such objectives.
Background
The Report responds to the mandate granted to EIOPA under Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). It is also a follow-up to the EIOPA Discussion Paper on the Prudential Treatment of Sustainability Risks [1] that was published on 29 November 2022 and to the EIOPA Consultation Paper on the Prudential Treatment of Sustainability Risks issued on 13 December 2023.[2]
Key findings
The Report summarises the findings of three areas of analysis:
- The first area of analysis focuses on identifying a potential link between prudential market risks and transition risks.
The first area of analysis focuses on identifying a potential link between prudential market risks and transition risks.
EIOPA concludes that while it is difficult to define economic activities that have a relatively low exposure to transition risks, there is a broad consensus on the definition of economic activities that are particularly harmful to the objective of climate change mitigation and that fossil fuel-related activities present an elevated risk profile in this respect.
EIOPA therefore recommends that a supplementary capital requirement of up to 17% be added for holdings of fossil fuel-related stocks and that a supplementary capital charge of up to 40% be added for holdings of fossil fuel-related bonds.
EIOPA considers that the impact of these measures on an undertaking’s solvency ratios should be limited because undertakings have generally low exposures to directly held fossil fuel-related stocks and bonds.
- The second area of analysis focuses on identifying a potential link between non-life underwriting risks and climate-related prevention measures.
EIOPA finds that although climate-related adaptation measures, such as anti-flood doors, could potentially reduce non-life underwriting risk in terms of premium risk, there is not enough data available to allow for a robust conclusion as to whether a dedicated prudential treatment of climate-related adaptation measures in the capital requirements for premium risk is justified.
In this context, EIOPA proposes that the analysis be repeated when more and better data is available.
- The third area of analysis focuses on identifying a potential link between social risks and prudential risks on the asset and underwriting side.
EIOPA considers that all components of sustainability risks, such as climate and social risks, should be treated similarly, but that not all concepts and prudential measures from climate analysis may apply in a similar manner to social aspects.
EIOPA therefore proposes to continue its work on this topic to develop application guidance to support the social risk materiality assessment for the purposes of (re)insurers’ own risk and solvency assessment (ORSA).
Next steps
The recommendations made in the Report have been submitted to the European Commission, which will review them and consider the implementation of the suggested additional capital requirements and charges.
