EIOPA Publishes Opinion on Sustainability Within Solvency II
EIOPA published an opinion on sustainability within Solvency II. In August 2018, EIOPA received a request from EC for an opinion on sustainability within Solvency II, with focus on climate change mitigation. EIOPA believes that insurers should assess their exposure to sustainability risks, which are expected to increasingly impact the insurance sector. The opinion, among other issues, addresses the integration of climate-related risks in Solvency II Pillar I requirements. EC will take the opinion into account in the preparation of its report on Solvency II Directive, which is due by January 01, 2021.
In providing this opinion, EIOPA has followed the questions posed by EC in its request and analyzed evidence collected through a public call for evidence, a confidential request for information, and a public consultation on a draft opinion on sustainability within Solvency II. EC, in its call for opinion, had requested views of EIOPA on the integration of sustainability, specifically climate-related developments, into the Solvency II framework for the valuation of assets and liabilities, investment and underwriting practices, the calibration of market and natural catastrophe risks, and the use of internal models. The opinion covers the following areas:
- The extent to which the valuation of assets and liabilities under Solvency II (can) capture sustainability factors
- How insurance and reinsurance undertakings, through their investment and underwriting practices, can account for sustainability considerations
- How/whether sustainability risks are reflected in capital charges for market and natural catastrophe risks under Solvency II
- The extent to which internal models capture sustainability risks and factors
- The way sustainability could best be taken into account across the three pillars in Solvency II
In its opinion, EIOPA calls for insurance and reinsurance undertakings to implement measures linked with climate change-related risks, especially in view of a substantial impact to their business strategy. EIOPA opines that undertakings should assess their exposure to sustainability risks, which will increasingly impact the insurance sector over the coming years and decades. EIOPA acknowledges that the medium- to long-term impacts of climate change cannot fully be captured in the Solvency II capital requirements, which have been designed to reflect the risks that undertakings are exposed to over a one-year time horizon. Therefore, EIOPA stresses the importance of scenarios analysis in insurer risk management. The scenario analysis will allow undertakings to consider the impact of sustainability risks beyond the one-year time horizon or where timing is unpredictable.
Furthermore, EIOPA is of the opinion that within a risk-based framework like Solvency II any change to capital requirements must be based on a proven risk differential compared to the status quo. Assessment of the underlying risk is, therefore, the starting point and guiding principle for the analysis and opinion on capital requirements related to sustainability. EIOPA is of the view that the current Solvency II framework does not hinder the integration of current climate change-related developments in the calibration of the standard parameters for the natural catastrophe risk module of the standard formula. A regular recalibration of the standard parameters for the natural catastrophe risk module of the standard formula (each 3 to 5 years) should take into account future developments as well as the potential effect of climate change using the latest data and science available.
Related Links
Keywords: Europe, EU, Insurance, Solvency II, Climate Change Risk, Sustainable Finance, Opinion, Pillar 1, ESG, EIOPA, EC
Featured Experts
Adam Koursaris
Asset and liability management expert; capable modeler; risk and capital specialist
Cassandra Hannibal
IFRS 17 subject matter expert; actuary; risk management and capital projection specialist
Jerome Ogrodzki
Insurance asset and liabilities modeling specialist; stochastic modeling expert
Previous Article
NBB Circular on Calculation of Contributions to Resolution FundRelated Articles
EBA Publishes Phase 2 of Technical Package on Reporting Framework 2.10
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
FASB Proposes to Delay Implementation of Insurance Contracts Standard
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA Updates Regulatory Approach to Loan Deferrals Amid COVID Crisis
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
BCBS and FSB Set Out Recommendations for Benchmark Transition
BCBS and FSB published a report on supervisory issues associated with benchmark transition.
IAIS Sets Out Recommendations for Benchmark Transition for Insurers
IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.
ESMA Updates Reporting Manual on European Single Electronic Format
ESMA updated the reporting manual on the European Single Electronic Format (ESEF).
EBA Calls on Resolution Authorities to Consider Impact of COVID Crisis
EBA published a statement on resolution planning in light of the COVID-19 pandemic.
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
ECB Guideline on Materiality Threshold for Credit Obligations Past Due
ECB published a guideline (2020/97), in the Official Journal of European Union, on the definition of materiality threshold for credit obligations past due for less significant institutions.
FED Temporarily Revises FR Y-14 With Respect to PPP and CARES Act
FED temporarily revised the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes in response to the COVID-19 pandemic.
