EIOPA publishes discussion paper on the Prudential Treatment of Sustainability Risks
Against the backdrop of the European Green Deal and its anticipated mandate from the European Commission to assess whether a dedicated prudential treatment of assets and activities associated with environmental or social objectives under Solvency II could be warranted for insurance undertakings, the European Insurance and Occupational Pensions Authority (EIOPA) published a discussion paper on the Prudential Treatment of Sustainability Risks (the Discussion Paper) on 5 December 2022. The Discussion Paper can be found in full here.
In issuing the Discussion Paper, EIOPA acknowledged the importance of ensuring that Solvency II, as a risk-based and forward-looking framework, reflects sustainability risks appropriately and emphasised the central role insurers have in driving sustainable finance. It also notes that sustainability-linked risks, and in particular climate-related risks (e.g. from natural disasters) can materially affect the investment and underwriting activities of insurance undertakings.
EIOPA has focused its assessment on three areas:
- Assets and transition risk exposures: this section of the Discussion Paper contains a study of how risks that stem from the transition to a more sustainable and less carbon-reliant economy could affect prudential risks related to assets such as stocks, bonds and real estate. Notably, EIOPA suggests that there ought to be consideration of the potential for a dedicated treatment of transition risk exposures in solvency capital requirements.
- Underwriting risk and climate change adaptation: this section contains a study of how physical risks related to climate change could impact the non-life insurance sector. This assessment focuses on the high (and substantially increasing) number of claims stemming from climate-related natural catastrophes, including in relation to property damage and business interruption. It also underlines the potential of the investment in climate-related adaptation measures in reducing loss exposure and premiums, outlining three dedicated case studies on the topic.
- Social objectives and social risks from a prudential perspective: this section seeks to define 'social objectives' and 'social risks' and to assess how social risks or harms to social objectives (for example, violations of labour or human rights) could translate into prudential risks and financial and reputational losses for insurance undertakings. It also assesses the corresponding prudential treatment in the context of current Solvency II requirements in respect of governance, risk management, reporting and disclosure.
Timing
EIOPA is seeking comments from stakeholders on the approaches presented in the Discussion Paper until Sunday, 5 March 2023. Comments are to be added using the EU Survey Tool and EIOPA has committed to considering the feedback it receives to develop its analysis further.
ALG comment
This Discussion Paper is lengthy, poses 82 specific questions for consideration and has many interesting and discussion-provoking features, even for those insurers that do not propose to comment formally. Of particular note are some potential questions for insurers to consider when assessing social risks through the ORSA, as well as a useful overview of the current EU regulatory framework for sustainability reporting requirements.
For further information, please contact Laura Mulleady, Partner, Sinéad Lynch, Partner, James Grennan, Partner, Jill Shaw, ESG & Sustainability Lead, or any member of the A&L Goodbody Insurance & Reinsurance team.
Date published: 7 December 2022