06 September 2022

EURACTIV: EU Parliament fights over sustainability criteria for insurance sector

In attempts to reach a common position on the review of prudential regulation for the European insurance sector, MEPs expressed starkly diverging opinions on whether and how to account for climate risks in the regulation.

The review of the Solvency 2 prudential regulation was proposed by the EU Commission in September 2021 to update the capital requirements for insurance companies to new economic circumstances.

While EU member states already agreed on a common position regarding this regulation, the European Parliament is still far from a common position.

Scrapping climate provisions

The draft position proposed by the centre-right member of Parliament Markus Ferber was criticised by left and green MEPs for scrapping most of the climate provisions that the EU Commission had proposed to include in the prudential rules.

“The rapporteur’s choice to scrap almost all provisions related to climate risk is quite a scandal in times of the Green Deal,” the green member of Parliament Henrike Hahn told EURACTIV, adding that his “approach to Solvency 2 is a denial of all the recent analysis showing the interlinkages between climate change and financial stability.”

The concern is that as society acts against climate change, many obligations or shares of companies in the fossil fuel industry would become worthless. If insurance companies do not properly take into account the risk of such “stranded assets”, this might pose a threat to the stability of the insurance industry.

Are insurance companies careful enough?

However, Ferber told EURACTIV that he had “not seen any evidence that insurance undertakings are systematically underestimating long-term risks stemming from climate change.”

“In fact, insurance companies have a very strong business incentive to capture long-term risks correctly and they have a good track record of doing so,” he said, adding that insurance companies had good risk models to cover climate and environmental risks.

He also warned of creating wrong incentives that might create a “green asset bubble”, stressing that arguments should be based on risks for financial stability.

In this argument, he is joined by the Greens’ Henrike Hahn. “We demand that prudential regulation should be risk-based,” she told EURACTIV.

“I certainly agree that it would be unwise to politicise the prudential framework for the insurance sector,” she said.

In her opinion, requiring insurance companies to explicitly take climate risks into consideration would help provide a level playing field for the insurance companies that already do this today.

Positions still “very far apart”

In the European Parliament’s committee on economic matters, Hahn is not the only one to be dissatisfied with Ferber’s approach to the Solvency 2 file.

“We need fundamental changes,” said the social-democratic lawmaker Eero Heinäluoma during a debate on the topic on 31 August, citing sustainability risks among other topics. Liberal policymakers also suggested including sustainability risks.

As Ferber acknowledged during the debate in the committee, the positions were still “very far apart.”

Hahn, meanwhile, is confident that the European Parliament will adopt a more climate-conscious position than the current draft. “I am glad to see in the amendments of my colleagues that there is already some considerable cross-party consensus on this issue,” she said.

EURACTIV

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