IIF Authors

Status: Will be live at 03/07/2023 12:27

IIF Response to EIOPA on the Prudential Treatment of Sustainability Risks

On March 3, the IIF responded to the European Insurance and Occupational Pensions Authority (EIOPA) discussion paper on the Prudential Treatment of Sustainability Risks. The consultation outlined the steps EIOPA is taking to assess whether Solvency II appropriately reflects sustainability risks and if a dedicated prudential treatment of assets and activities associated with environmental or social objectives is warranted. The consultation also discussed the intended scope, methodologies and data sources for this assessment exercise.

In its response, the IIF commended EIOPA for its ongoing work on sustainability risks and agreed that the prudential analysis of these risks needs to be risk- and evidence-based. The response highlighted the emerging consensus among technical climate practitioners that Pillar 1 prudential capital requirements are not an ideal response to climate-related risks. Further, isolating transition risks (especially from spread risks), which would be captured under Solvency II, can be extremely difficult as they de-pend upon changing political, economic, social, technological and regulatory developments across jurisdictions.

The IIF noted that insurers are actively engaged in reflecting adaptation measures in their underwriting policies and risk-adjusted pricing. It emphasized that the insurance industry has long been managing cli-mate-related risks through a variety of tools, including through the own risk and solvency assessment (ORSA), which allows for greater flexibility and proportionality of the and make it a substantially better tool for analyzing
forward-looking climate risks.