Report
In its response to the EIOPA public consultation on the prudential treatment of sustainability risks in the insurance sector, Finance Watch welcomes EIOPA’s recognition of the higher risk of fossil fuel-related assets and supports a call for stricter prudential treatment of these investments.
EIOPA has published a public consultation on the potential for differentiated prudential treatment of sustainability risks under Solvency II, to which Finance Watch replied.
The consultation focused on three areas, being (1) the link between equity, spread and property risk and transition risk, (2) the link between non-life underwriting and climate-related adaptation measures, and (3) the link between social and prudential risks.
In its response, Finance Watch welcomes EIOPA’s integration of forward-looking risk methodologies for assessing the equity and spread risk of fossil fuel-related assets. This is crucial to capturing the impact of climate-related risks on asset values and Finance Watch believes forward-looking information will only become more granular as CSRD-mandated transition plans become widely published.
The consequent recognition of the higher risk profile of fossil fuel-related assets, and EIOPA’s proposals for a dedicated prudential treatment of these assets under equity and credit spread risk sub-modules are an important step forward in successfully managing climate risk within the insurance sector. This is also a major milestone in restoring the risk-based nature of the prudential capital framework for insurers.
Finance Watch has been strongly advocating for years that fossil fuel-related assets and investments should be held to higher capital requirements due to the higher risk they pose to institutions’ portfolios and the financial system as a whole. Exploration of new fossil fuel reserves is incompatible with the science-based climate scenarios, whereas 77% of the known fossil fuel resources face the risk of stranding.
EIOPA is currently not proposing a differentiated prudential treatment for property risk, nor further policy actions on non-life underwriting and social risks, based on a lack of appropriate data. Finance Watch encourages EIOPA to continue work in this area, as advancing climate change is already having an impact on insurance underwriting business with negative effects for the policyholders.
