EIOPA analyses sustainability risks using both backward-looking historical data and forward-looking model assessments to evaluate the need for specific prudential treatment of transition risks. The analysis focuses particularly on equity and spread risks in fossil fuel-related assets. For equities, three policy options were considered, where Option 3 states: implementing a supplementary capital requirement up to 17% on fossil fuel-related stocks. Similarly for bonds, among three options, Option 3 states: introducing a supplementary capital charge up to 40% for fossil fuel-related bonds. Both recommendations stem from evidence showing elevated risk profiles in fossil fuel-related assets compared to other sectors. However, the impact on insurers' solvency ratios is expected to be limited due to their relatively low direct exposure to fossil fuel assets.
Non-Life Underwriting Risks and Climate-Related Prevention Measures
EIOPA conducted a study examining how climate adaptation measures, such as flood prevention installations, might affect non-life insurance premium risks. The research concentrated on private adaptation strategies that could be integrated into insurance products by either policyholders or insurers. The organization gathered data from non-life insurers in 2022, including both quantitative information and a qualitative survey exploring effects on reserve and natural catastrophe risks. While initial findings suggested potential reductions in premium risk, the limited data sample prevented definitive prudential conclusions. In order to justify specific prudential treatment for climate adaptation measures in premium risk capital requirements, EIOPA should revisit its analysis, when more data is available and consider including natural catastrophe risk assessment in future iterations.
Social Risks
EIOPA examined how social risks could transform into prudential risks across both asset and underwriting domains. All sustainability risk components, including climate and social risks, should receive similar treatment in terms of identification and management. While social impacts are significant under the double materiality principle, EIOPA's qualitative analysis reveals that not all climate-related prudential measures and concepts can be directly applied to social aspects, particularly regarding scenario analysis and quantitative reporting requirements. Given that social risks are likely to evolve into prudential risks, and considering the limited practical guidance available for insurers in managing these risks, EIOPA recommends continuing work on developing guidance to help insurers assess social risk materiality within their Own Risk and Solvency Assessment (ORSA).
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