European Parliament’s Committee on Economic and Monetary Affairs Agrees Position on Solvency II

On 18 July, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) agreed a position on updating Solvency II, the prudential regime for insurance and reinsurance undertakings in the EU. Finance Watch, the pan-European NGO advocating to make finance serve society, supports important improvements to better capture ESG and crypto-asset risks, but has serious concerns over the levels of capital relief being granted.

Finance Watch supports key updates to the rules to better capture environmental, social and governance (ESG) risks in the Parliament’s position. Key improvements here include provisions on transition planning aligned with the existing disclosure requirements of the Corporate Sustainability Reporting Directive (CSRD) and to ensure ESG risks are explicitly integrated into insurers risk management processes. The Parliament’s position also ensures supervisory oversight of the different measures insurers need to take to manage ESG risks in the short, medium and longer term.

An important amendment was also agreed to give EIOPA a mandate to adopt a precautionary approach to adjust capital requirements for crypto-asset exposures. This is an important precedent for emerging risks, to ensure that the framework is able to look beyond historical data and properly capture these risks.

The provisions on ‘capital relief’ do, however, raise concerns as they go beyond what the European Insurance and Occupational Pensions Authority (EIOPA) has advised as being appropriate from the perspective of financial stability and policyholder protection. One of the justifications behind reducing capital requirements is to provide more long-term real economy investment from the insurance industry to support the sustainable transition. This moves away from the core risk-based logic of prudential regulation to properly assess and manage risk, notably in the situation where climate-related risks are not yet reflected in the insurers´ capital requirements.

Julia Symon, Head of Research & Advocacy at Finance Watch, said: 

“Importantly, the Parliament’s position recognises the need to address ESG risks, including through transition planning and supervisory oversight of the ESG risk management. Yet, more work needs to be done to ensure capital requirements account for climate-related risks, such as the risks of fossil fuel exposures which are certain to lose their value in the sustainable transition. Investments in fossil fuels are incompatible with the insurers long-term view on risk. The EIOPA mandate adopted by the Parliament remains key to further work on this.”

The finalisation of the Parliament’s position comes after months of standstill and debates over the key issues of capital relief and sustainability. Trilogue negotiations will now follow, with the view to reaching a final agreement by the co-legislators before the end of the current legislative mandate.

To arrange an interview with Julia Symon, Head of Research & Advocacy at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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