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.
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Keywords: Europe, EU, Insurance, Solvency II, Climate Change Risk, Sustainable Finance, Opinion, Pillar 1, ESG, EIOPA, EC
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