EU insurance industry urges supervisors not to namecheck sustainability in regulation

Feedback to European Insurance and Occupational Pensions Authority

Insurance Europe, the German Insurance Association, the Investment and Life Assurance Group and trade body AMICE are among those pushing back against the explicit integration of sustainability risks into EU regulation for the insurance industry.

The European Insurance and Occupational Pensions Authority (EIOPA) published on Friday its “Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD”. The advice, which was prompted by a request from the European Commission last July, refers to the embedding of sustainability into Solvency II and the Insurance Distribution Directive as part of the EU’s broader Action Plan on Sustainable Finance.

IDD entered into force just last year, and applies to all distributors of insurance products, including brokers, financial advisors, insurance sales teams and distributors such as airlines and car rental firms. It requires enhanced knowledge levels, and stricter governance and disclosure requirements (including on remuneration). Solvency II is a longer-standing regulation introduced to strengthen capital requirements for insurance companies.

“EIOPA strongly supports the European Commission’s Sustainable Finance Action Plan, including the aim to integrate sustainability considerations into the prudential and conduct framework for insurers, reinsurers and insurance distributors,” the body said in a statement, saying it “advises to embed carefully sustainability” in regulation relating to both directives.

On Solvency II, it says “it is prudentially relevant to require undertakings to take into account the impact of their investment strategy and decision on sustainability factors.

“The resilience of the real economy and the stability of the financial system, fuelled by integrating sustainability considerations in the investment strategy and decisions, has the potential to impact on the risk-return characteristics of a portfolio,” it continues.

Its advice on ensuring sustainability risks are integrated into the risk management side of insurance participants points out that existing rules require that “already now all risks, and therefore also sustainability risks, should be taken into account”. “However, due to the relative novelty of sustainability risks and the particular long time horizon and uncertainty of risks related to climate change, it seems advisable to more explicitly integrate sustainability risks in some aspects of the system of governance”.

But many industry bodies and firms warned against explicitly referencing sustainability in regulation, according to the feedback responses. Twenty-seven organisations offered feedback on the proposals – 13 industry associations, four (re)insurance groups, two consumer representatives and eight “others”. This was in addition to 30 members of the Insurance and Reinsurance Stakeholder Group, which includes Aviva, Allianz, Aegon and Generali.

Allianz pointed out in its feedback that there is already a requirement within risk management rules “to identify and assess all risks to which undertakings may be exposed”.“[A]n explicit reference to sustainability risks introduces an element of redundancy and may overemphasise this particular element of an – by definition – comprehensive risk management process resulting in legal imbalance”.

“Already now, all types of risks, including sustainability risks, should be taken into account,” it said.

The UK’s Investment and Life Assurance Group claimed that “most firms will already be considering ESG issues as part of their selection of investments, albeit not specifically referred to as sustainability risk”.

The German Insurance Association said it did “not regard it as necessary to make an explicit reference on the tasks of the risk management in relation to the identification of sustainability risks”, saying this could “result in the identification and assessment of sustainability risks being over-emphasized as it is one of many existing risks which may be relevant in the long-term”.

The Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE) said it was “clear that the role of the risk management function already includes these tasks, as implied in current legislation,” and that “there is no need for clarification of these particular tasks”.

EIOPA countered this by pointing out that the consideration of sustainability risks differed significantly between companies, and an explicit reference would confirm to all market participants that these risks should be considered. In relation to the IDD, it acknowledged concerns about explicitly referencing ESG considerations, but said it “considers this explicit reference necessary in view of the novelty of this topic and to raise awareness amongst stakeholders around his subject matter”.

The Principles for Responsible Investment came out in support of the proposals, saying that – although sustainability risks should be part of considerations under existing rules – “we find that this is not yet systematic”.

“Our analysis demonstrates that the lack of regulatory clarity, rather than the novelty of these risks, is a critical barrier to more systematic integration. To that effect, we welcome the introduction of specific language in Article 269 to remove ambiguity and draw attention to the need to assess these risks, in combination with the introduction of the new article in the Solvency II Delegated Regulation on the prudent person principle,” the organisation said in its feedback to the consultation.

Another key theme was that many insurance companies and bodies wanted EIOPA to hold off on introducing further rules around sustainability risks until the EU’s taxonomy was complete. However, EIOPA pushed back on this request, pointing out that its focus was on sustainability risks, while the taxonomy looks at sustainable investment categories, which was a different topic.