European Commission to mandate climate scenario analysis in Solvency II

Published in: Cat risk, Regulation, Solvency II, Investment risk - strategy, Rest of Europe, Climate change and sustainability

Companies: European Insurance and Occupational Pensions Authority, Eiopa, European Commission

The European Commission will expect insurers to perform climate scenario analysis under its proposed reforms to Solvency II.

In a discussion document seen by InsuranceERM, the Commission is set to introduce a new article to the directive, which will demand insurers identify any material exposure to climate change risks and assess the impact of long-term climate change scenarios on their business. This will be reported to regulators via the own risk and solvency assessment.

Larger EU insurers have already had to conduct climate scenario and stress tests, but the new proposal is set to embed climate risk analysis in most insurers.

The Commission is also revamping how smaller and lower-risk insurers apply Solvency II rules. Under the new proportionality proposals, low-risk firms will be exempt from the scenario analysis requirements.

However, the controversial question of whether sustainable assets should receive a lower capital charge may not be resolved for another two years.

The Commission is to give the European Insurance and Occupational Pensions Authority (Eiopa) a mandate to report, by the end of June 2023, on whether assets “associated substantially with environmental and/or social objectives” should receive a dedicated prudential treatment.

Eiopa has also been given a mandate to review the calibration of natural catastrophe risk charges in Solvency II, at least every three years, to ensure they reflect any changes in risk due to climate change.

The Commission is due to officially publish its proposals within the next few weeks. The plans will then be scrutinised by the Parliament and Council, and are expected to come into effect by 2024 at the earliest.

Christopher Cundy