The European Insurance and Occupational Pensions Authority has published a report suggesting the European Commission enforce higher capital requirements for fossil fuel assets owned by insurers. This opinion is based on the assessment the latter has made on the serious transition risks that these assets hold regarding climate-related economic shifts. This is the latest step in a growing list of moves within the EU aimed at forcing greater sustainability on the financial sector-this time, specifically on protecting insurers from the risks that investments in fossil fuels will pose to them.
The report by EIOPA comes after the authority was solicited by the European Commission to comment on whether there were specific regulatory measures to be specifically adopted for assets directed toward environmental or social objectives. Major areas of analysis would involve climate transition-related market risk, preventive climate measures in underwriting non-life insurance, and assessment of social risks.
EIOPA noted that climate transition risks make fossil fuel stocks and bonds more prone to risks as the economies become less dependent on high-carbon energy resources. To mitigate these risks, EIOPA recommends insurers to build up their capital buffer for such assets by as much as 17% in terms of increased capital requirements for fossil fuel stocks and by as much as 40% in the case of fossil fuel bonds. Such measures, set to be adopted, would ensure that insurers absorb loss which may emanate from their fossil fuel investments, often at a risk of becoming “stranded assets” as the economies decarbonize.
To that effect, the report is quick to note that underwriting risk through such preventive action related to climate would be reduced due to the actions of installing flood-resistant doors or creating fire-proof zones around properties. However, EIOPA cautions that better-quality data are necessary for underwriting practices more convincingly assessed in relation to such measures.
On the social risk side, EIOPA acknowledges the sustainability risks and all forms thereof, which may include issues regarding social concerns. However, based on a scarcity of data collection, the report does not make any short-term regulatory changes on the social risks on account of.
On social risks, EIOPA indicated that insurers are beginning to realize the risk associated with unsustainable business processes against the backdrop of sectors like those which are not complying to the demands of climate change. The new report emphasizes the importance of getting the insurers ready for climate transition impacts on their portfolios of assets. Since the report is submitted, EIOPA awaits a decision from the European Commission to introduce these new capital requirements on fossil fuel assets, potentially transforming the way investment is made in risky sectors by insurers as the EU increases its dedication to the way of a sustainable economy.