trending Market Intelligence /marketintelligence/en/news-insights/trending/w1z5rvwcxtbrxgthajnkvw2 content esgSubNav
In This List

EU green finance plan could speed insurers' exit from climate-unfriendly sectors

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


EU green finance plan could speed insurers' exit from climate-unfriendly sectors

A plan to factor environmental risks into European insurers' capital requirements could accelerate a move away from the underwriting of and investment in industries that contribute to climate change, Moody's said.

Pan-European insurance trade body Insurance Europe has welcomed the overall plan but has urged regulators to make changes to prudential requirements "on the basis of the actual risks, not on the basis of artificial incentives."

The European Commission, the executive arm of the European Union, announced a sustainable finance action plan on March 8, which included a proposal to factor environmental considerations into banks' and insurers' capital requirements. This means firms with green investments could see a cut in regulatory capital requirements. The plan also aims to encourage more investment in sustainable infrastructure projects.

The Commission said it will invite pan-European insurance regulator the European Insurance and Occupational Pensions Authority to provide an opinion, in the third quarter of 2018, on how sustainable investments affect prudential capital rules. It will take this opinion into account in its report on the Solvency II capital rules to the European Parliament and Council, which is due by Jan. 1, 2021.

Moody's said the plans for insurers' capital requirements "could accelerate a shift, already underway for some insurers, to reduce underwriting exposure to, or divest from, sectors that contribute to climate change, or could be negatively affected by it."

Some large insurers have started to curtail their investments in and underwriting of polluting industries. French insurance group Axa, for example, announced in December 2017 that it is targeting €12 billion of green investments by 2020 and that it will phase out insurance coverage for new coal construction projects and oil sands businesses.

The ratings agency noted that nonlife insurers already assess how climate change affects their natural catastrophe-related liabilities, but that this is not always formally included in their capital requirements. It said in the report: "There remains uncertainty about how climate change will affect the value of insurers' invested assets, or how changing weather patterns will affect their loss exposure. However, we believe it would be prudent, and positive from a credit perspective, to include a consideration of these longer-term effects in capital requirements."

Insurance Europe, which represents 35 industry associations across the continent, welcomed the European Commission plan. On the plans to link capital requirements to sustainability, it said: "The insurance industry supports rules that measure and capture real risks. If there is evidence that green and/or sustainable investments are less risky than other investments, prudential regulation has to recognize this on the basis of the actual risks, not on the basis of artificial incentives."

Insurance Europe Deputy Director General Olav Jones added: "In the Solvency II regulation that governs EU insurers, the risks relating to long-term business and investments, including sustainable ones, are currently not correctly measured. This creates unnecessary disincentives. The upcoming Solvency II 2020 review ... must be appropriately scoped and address the pertinent questions and valuable recommendations made by the High-Level Expert Group on Sustainable Finance."