At least €1trn of European insurance assets face climate risk – supervisor

Even this huge figure may understate scale of exposure, says EIOPA

At least €1trn of assets held by European insurance companies may be vulnerable to the climate transition, says EU supervisory body EIOPA.

In a risk assessment released just before Christmas, the European Insurance and Occupational Pensions Authority said that up to 13% of the assets held by insurers may be vulnerable in a climate-related transition scenario.

And even this figure may understate insurers’ total potential risks, EIOPA acknowledged.

“Overall, between 10 and 13% of the assets held by insurers may be vulnerable in a climate-related transition scenario,” EIOPA said. To arrive at the figure it used Solvency II item-by-item investment data reported by European solo insurers.

“This amounts to more than €1trn in assets and corresponds to almost two-thirds of total own funds in the EEA [European Economic Area].”

But even this huge number may not fully reflect the scale of the exposure, with EIOPA warning: “It is important to note that this figure might still understate the total potential risks to insurers from climate-change relevant assets, as further climate-related assets could be held in funds in the finance sector (for which look-through was not possible).There could be “second-round losses” with indirect losses in insurers’ investments due to the devaluation of financial counterparties’ with high exposures to climate-sensitive sectors themselves.

“In addition, the high share of exposures to other financial institutions can lead to significant second round effects.”

“Between 10 and 13% of the assets held by insurers may be vulnerable”

EIOPA concluded: “The conducted research indicates that the magnitude of second-round effects can vary significantly and can even be comparable in magnitude to first-round effects, especially for high levels of interconnectedness.”

EIOPA said in November that it plans to stress-test pension funds and insurers for ESG risk.

Also released just before the break, ESMA, the European Securities Market Authority, a peer of EIOPA, launched consultations on integrating sustainability risks and factors into the MiFID II investment rules and the UCITS fund regime. It is also looking at disclosures for credit rating agencies. The consultations, part of ESMA’s push to support the European Commission’s Sustainability Action Plan, run until February 19.