EIOPA Proposes Higher Capital Charges for Insurers’ Fossil Fuel Assets
- EIOPA advises additional capital charges for insurers’ fossil fuel assets, proposing up to 17% added capital for stocks and up to 40% for bonds.
- The measures aim to align capital requirements with the heightened transition risks associated with fossil fuel investments, enhancing insurers’ resilience.
- Recommendations include future analysis of non-life underwriting and consideration of social risks, though no specific prudential treatments for social risks are suggested at this stage.
The European Insurance and Occupational Pensions Authority (EIOPA) has released its final report on the prudential treatment of sustainability risks under Solvency II, recommending increased capital requirements for insurers holding fossil fuel assets. This move aims to better reflect the significant transition risks these assets pose and follows a directive from the European Commission to evaluate sustainability risks within insurers’ portfolios.
Key Recommendations
EIOPA’s data-driven analysis, which incorporated stakeholder feedback, identifies fossil fuel-related equities and bonds as having greater exposure to transition risks compared to assets from other sectors. To mitigate potential financial losses, EIOPA proposes an up to 17% additional capital charge for stocks and a 40% surcharge for bonds, aligning capital requirements with these higher-risk exposures.
The analysis highlights that while this adjustment would moderately increase capital demands, it would have a limited overall effect on insurers’ solvency ratios due to their relatively low direct exposure to fossil fuel stocks.
Related Article: Europe Faces Rising Climate Risks: Only 25% of Losses Insured Amid Escalating Extreme Weather
CEO Insights
EIOPA’s report further examines how preventive climate adaptation measures can reduce underwriting risks. Although initial findings indicate potential benefits, EIOPA plans to revisit this analysis when higher-quality data becomes available for more conclusive results.
Social Risks
The report also explores the prudential treatment of social risks, emphasizing their importance under the double materiality principle. However, due to data limitations, EIOPA does not recommend a specific prudential approach at this time but plans to develop guidance for assessing social risk materiality within insurers’ Own Risk and Solvency Assessment (ORSA).
Next Steps
The recommendations have been submitted to the European Commission for consideration, with an advisory to integrate these proposals thoughtfully into broader sustainability regulations to ensure consistency and support for transition goals.
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