The European Insurance and Occupational Pensions Authority (EIOPA) has published an Opinion on Sustainability and Solvency II. The Opinion addresses the integration of climate-related risks in Solvency II Pillar I requirements.
While Solvency II – as a risk-based, forward-looking and market-consistent framework – is well equipped to accommodate sustainability risks and factors, climate change brings considerable challenges to the valuation of assets and liabilities, underwriting and investment decisions and risk measurement.
Climate change increases the uncertainty about the occurrence and the impact of physical or transition risks, which can happen at any time and suddenly, with far-reaching consequences. Hence, undertakings should not be complacent about these risks.
(Re)insurance undertakings are called to implement measures linked with climate change-related risks, especially in view of a substantial impact to their business strategy. Consequently, EIOPA stresses the importance of scenario analysis in the undertakings’ risk management.
To increase the European market and citizens’ resilience to climate change, (re)insurers should consider the impact of their underwriting practices on the environment. Consistently with sound actuarial practice, where risk mitigation and loss prevention can make a significant difference, the development of new insurance products, adjustments in the design and pricing of the products and the engagement with public authorities, should be part of the industry’s stewardship activity.