On 30 September 2019, the European Insurance and Occupational Pensions Authority (EIOPA) published an Opinion on sustainability within Solvency II. The Opinion follows a request made in August 2018 by the European Commission for an opinion on sustainability with an emphasis upon climate change mitigation. The European Commission will take the Opinion into account in preparation for its report on Solvency II (due by January 2021).
The European Commission have asked EIOPA to elaborate on the extent to which cash flow projections for the calculation of the best estimate, in particular regarding how loss estimates capture sustainability and climate related developments. The European Commission also wants EIOPA to consider where rules on the valuation of assets do not sufficiently account for sustainability factors, particularly whether investments are exposed to climate risks. Where existing requirements do not take into account climate risks, EIOPA should provide estimates for the quantitative impact of climate change. In addition, the European Commission asked EIOPA to collect examples of good practices in relation to asset liability management with a view to gaining insight into how the calibration of standard parameters in the market risk module of the standard formula do not account for sustainability factors.
The opinion covers the following areas:
- the extent to which the valuation of assets and liabilities under Solvency II can capture sustainability factors;
- how (re)insurance undertakings, through their investment and underwriting practices, can account for sustainability considerations;
- how/if sustainability risks are reflected in capital charges for market and natural catastrophe risks under Solvency II;
- the extent to which internal models currently capture sustainability risks and factors; and
- how sustainability could today be best taken into account across the three pillars in Solvency II (Pillar I – capital requirement, Pillar II – governance and supervision and Pillar III – disclosure and reporting).
The European Commission’s report is due by 1 January 2021.