EIOPA report on the Prudential Treatment of Sustainability Risks
On 7 November, the European Insurance and Occupational Pensions Authority (EIOPA) published a report on the Prudential Treatment of Sustainability Risks. This report was driven by Article 304c of the Solvency II Directive to assess the need for targeted prudential treatment of assets associated with environmental or social objectives (or harm to same).
EIOPA has recommended that a capital charge be added for fossil fuel-related corporate bonds and equity investments held by insurance companies to reflect the higher risk associated with these holdings. For stocks, EIOPA proposes raising capital requirements by up to 17% in addition to the current capital charge. For bonds, EIOPA recommends a capital charge of up to 40% in multiplicative terms in addition to existing capital requirements.
If adopted by the European Commission, this recommendation would increase costs for affected insurers.
While EIOPA recommends the capital surcharge, the following considerations have been highlighted in the report:
Despite these considerations, EIOPA is firm in its recommendation to support the safeguarding and protection of European policyholders in the longer term.
This recommendation is a key shift in approach towards integrating environmental and social objectives in the Solvency II Framework. Increasingly, the insurance sector is identified as vulnerable to climate and environmental risk, from both a transition and physical risk perspective.
The European Commission (EC) will review the report and determine whether it is appropriate to adopt the recommendation.
EIOPA opinion paper on Reassessment of Nat Cat Standard Formula
Building on the November report, EIOPA published an opinion paper on 30 January 2025 relating to the reassessment of the Natural Catastrophe (Nat Cat) standard formula completed in 2023 and 2024. EIOPA confirmed that the standard parameters for the Nat Cat risk model should be recalibrated every three to five years considering future developments, including the impact of climate change using the latest data available. In the paper, EIOPA proposes adjusting standard formula risk factors for physical climate risk perils like flood, hail, earthquake and windstorms for certain regions, while also expanding the number of countries considered. For example, Ireland was proposed to be included in the standard formula for flood risk (along with Luxembourg and Norway) as their flood exposures were deemed to be material.
The most prevalent changes to risk factors related to flood, windstorms and hail across several identified countries owing to material changes to weather patterns identified.
The proposal has been submitted to the EC, with the advice for a potential (re)calibration of the relevant standard formula parameters to be considered and assessed.
CBI Supervisory Priority
As proposals in respect of C&E risk identification and management are advanced at EU level, the Central Bank of Ireland (CBI) has simultaneously made clear in its December 2024 Insurance newsletter that one of the five CBI supervisory priorities for the insurance sector in 2025 is Sustainability. The CBI’s supervisory engagement will emphasise how climate change risks (long-term view to be considered) and any related implications on strategy and business model are integrated into governance and risk management frameworks. The CBI assess that insurers and reinsurers may be exposed to climate change through the increased frequency and severity of climate events, as well as financial instability which may be triggered by a ‘disorderly’ transition to a low carbon economy. The expectation is that firms will assess this level of exposure and integrate related risk considerations into the risk management framework.
If you have any questions about how best to approach C&E risk management or would like insights on industry best practices, please contact consulting Director, Niamh Doyle.
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