Today EU co-legislators came to a political agreement on the review of the European prudential rules for insurance and reinsurance undertakings, Solvency II. Important improvements to the current framework have been agreed to better capture sustainability risks. Financial stability concerns remain though as a high capital relief has been confirmed as part of the agreement.
Finance Watch, the pan-European NGO advocating to make finance serve society, welcomes progress made in the agreement on better tackling sustainability risks. This includes requirements for improved oversight of insurers sustainability risks with a ‘prudential transition plan’, explicitly integrating these risks into risk management and supervisory review processes. However, concerns remain over the levels of capital relief under the agreement, which go well beyond what the European Insurance and Occupational Pensions Authority (EIOPA) has advised as being appropriate from the perspective of financial stability and policyholder protection.
Finance Watch continues to question the justifications behind reducing capital requirements with a view to providing more long-term real economy investment from the insurance industry to support the sustainable transition amongst other things. This moves away from the core risk-based logic of prudential regulation to properly assess and manage risk, notably in the situation where climate-related risks are not yet reflected in the insurers´ capital requirements.
Julia Symon, Head of Research and Advocacy at Finance Watch, said:
“The agreement today represents an important step towards tackling the sustainability risks faced by the insurance industry. There is still a long road ahead though, with significant gaps remaining on capital requirements to account for climate-related risks and to ensure transition planning requirements are well defined and properly met”
EIOPA looks set to receive a number of mandates to finalise the detailed requirements of the review. This would include setting out methodologies for prudential transition plans and assessing what further requirements are needed to address sustainability risks. This represents a crucial opportunity to ensure that the framework is fully upgraded to tackle ESG risks that are difficult to capture under the existing rules.
Once the European Parliament and Council of the EU have finalised technical discussions and approved a final text for the Solvency II review then the European Commission will kick start the official processes for EIOPA to work on these mandates.
To arrange an interview with Julia Symon Head of Research & Advocacy at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233
About Finance Watch
Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.
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