EIOPA recommends additional capital requirements for fossil fuel assets on insurers’ balance sheets

Written by Adam Cadle

07/11/2024

EIOPA has published its final report on the prudential treatment of sustainability risks within Solvency II, recommending additional capital requirements for fossil fuel assets on European insurers’ balance sheets to accurately reflect the high risks of these assets.

For stocks, EIOPA proposes raising capital requirements by up to 17% in additive terms on top of the current capital charge, leading to a moderate increase in insurers’ capital requirements.

For bonds, EIOPA recommends a capital charge of up to 40% in multiplicative terms in addition to existing capital requirements, instead of introducing no change at all or applying rating downgrades to fossil fuel-related bonds.

The report also examined how social risks can translate into prudential risks on insurers' balance sheets and outlines future efforts to develop application guidance to help insurers assess social risk materiality as part of their Own Risk and Solvency Assessment (ORSA). Due to the current lack of data and risk models, EIOPA does not recommend a specific prudential treatment of social risks at this stage.

EIOPA has submitted its recommendations to the European Commission, advising it to thoroughly consider the proposals within the broader context of sustainability regulation, including cross-sectoral consistency, potential impacts on transition efforts, and possible evolution of relevant regulatory frameworks. The Commission will review the report and consider implementing the proposed additional capital requirements for fossil fuel assets.

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