Featured Product

    EIOPA Presents Sensitivity Analysis on Climate Change Transition Risks

    December 15, 2020

    EIOPA published a report presenting sensitivity analysis of the climate-change-related transition risks in the investment portfolio of European insurers. The report explores current holdings of corporate bonds and equity that can be related to key climate-policy relevant sectors such as fossil fuel extraction, carbon‐intensive industries, vehicle production, and the power sector. It also quantifies potential climate-change-related transition risks and presents insights into the possible impact of these risks on such investments, as economies transition away from fossil fuel-dependent energy production and carbon-intensive production. The results of the analysis show that these investments may expose the insurance sector to transition risks in the event of a drastic alignment of the economies to an outcome in line with the aims of the Paris Agreement to limit global warming.

    EIOPA has established a comprehensive strategy and work-plan under the umbrella of sustainable finance. This report contributes to that work and to informing the future work at EIOPA, including potentially future stress testing. Using data reported under Solvency II and available to EIOPA, combined with external data sources, this sensitivity analysis represents a first assessment of climate-change related “transition” risks in the portfolio of European insurers. To quantify these risks, this report employs a “what-if” scenario analysis based on the identified holdings and government bond holdings to provide insights into possible values at risks under the scenarios and assumptions employed. The “what-if” scenarios draw input from several external sources and combine them in a consistent narrative calibrated on the current holdings of European insurers. Also, this report considers part of the challenges faced by European insurers in this context, namely asset-side transition risks; it does not explore changes to the liabilities and, therefore, does not consider any impact on measures such as own funds or capitalization.

    The results in this report show that with relatively conservative estimates for both holdings and price adjustments, losses on equity investments in the high-carbon sector can be high, reaching up to 25% on average for these particular equity holdings (before accounting for any counterbalancing investments in e.g. renewable energy). However, the overall impact on the balance sheets of the insurance sector is counter-balanced both by investments in renewable energy and the fact that the high-carbon investments considered here account for a small part of the total investments of European insurers. Losses on bonds are also lower than those on equities. Solvency II is a risk-based regime and insurers, therefore, generally hold well-diversified portfolios, which is reflected in the overall size of the losses. Despite this, impacts compared to excess of assets over liabilities, a relevant measure of impact, are non-negligible and may be substantial under the more severe assumptions and scenarios considered in this analysis.

     

    Related Links

    Keywords: Europe, EU, Insurance, ESG, Climate Change Risk, Transition Risk, Solvency II, Paris Agreement, Green Deal, Sustainable Finance, EIOPA

    Featured Experts
    Related Articles
    News

    HKMA Finalizes Policy Modules on Group-Wide Approach and Remuneration

    The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.

    July 29, 2021 WebPage Regulatory News
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    ECB Study Assesses Impact of Basel III Finalization Package

    The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.

    July 26, 2021 WebPage Regulatory News
    News

    ISDA Finds FRTB Results in Higher Capital Charges for Carbon Trading

    The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.

    July 26, 2021 WebPage Regulatory News
    News

    PRA Updates Remuneration Policy Statement Templates and Tables

    The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.

    July 26, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7311