The European Insurance and Occupational Pensions Authority (EIOPA) has released its final report on the prudential treatment of sustainability risks under Solvency II, proposing increased capital requirements for fossil fuel-related assets on European insurers’ balance sheets. This recommendation seeks to better align capital reserves with the high transition risks associated with fossil fuel investments, reflecting the potential impact of these assets on insurers’ risk profiles.
The report, mandated by the European Commission, evaluates how assets linked to environmental, social, and governance (ESG) criteria should be treated within the Solvency II framework. It is based on extensive risk-based analysis, drawing on data from stakeholders and input received during a public consultation process. The findings cover three main areas: the market risks of climate transition-exposed assets, the potential impact of climate adaptation measures on non-life underwriting risks, and the prudential consideration of social risks.
The recommendation, proposes a 17% additive increase to capital requirements for fossil fuel-related stocks and a 40% multiplicative surcharge for fossil fuel bonds. EIOPA’s analysis found that these assets, more vulnerable to transition risks than those in other sectors, require additional capital to cover potential losses, especially as the world transitions toward cleaner energy sources. EIOPA’s impact assessment indicated that these surcharges would not drastically affect insurers’ solvency ratios, given insurers’ relatively modest direct exposure to fossil fuel assets.
Alongside these adjustments for market risks, the report explores other aspects of sustainability in insurance. EIOPA assessed climate adaptation measures, like anti-flood doors or fire-resistant landscaping, that could potentially lower non-life underwriting risks. Although preliminary results indicate these measures may help, EIOPA suggests further research once higher-quality data is available to draw more robust conclusions.
The report also addresses social risks as another focal point. While no specific recommendations are made for social risk at this stage due to a lack of adequate data and risk models, EIOPA encourages insurers to integrate social risk assessments into their Own Risk and Solvency Assessment (ORSA) frameworks.
EIOPA submitted its findings and recommendations to the European Commission, urging consideration within the larger scope of sustainability regulation, including cross-sector consistency and potential effects on Europe’s broader transition goals. The Commission will now review the report, which could lead to policy shifts requiring insurers to hold additional capital against fossil fuel assets as part of future regulations under the Solvency II directive.
