European insurers’ ratings will remain unaffected by the proposed capital surcharges on fossil fuel-related assets, according to Fitch Ratings. The European Insurance and Occupational Pensions Authority (EIOPA) proposed the surcharges to address transition risks associated with such assets.
However, these measures are expected to have minimal impact on Solvency II (S2) ratios due to insurers’ limited direct exposure to fossil fuel equities and bonds. Fitch’s Prism Global model capital scores will also remain unchanged.
EIOPA has suggested adding up to 17 percentage points (pp) to the 39% risk charge for Type 1 equities under the S2 standard formula. These equities are listed in regulated EEA or OECD markets.
Additionally, for spread risk on corporate bonds, EIOPA recommended a supplementary charge of up to 40% in multiplicative terms.
The Council of the EU have reached a provisional agreement on amendments to the Solvency II directive, the EU’s main piece of legislation in the insurance area and new rules on insurance recovery and resolution (IRRD).
The provisional agreement assigns a number of new tasks to the European Insurance and Occupational Pensions Authority (EIOPA), not least in terms of elaborating various strands of technical standards, i.e. secondary legislation that will frame a more precise and harmonised implementation of the Directive in the Member States.
The Council and Parliament agreed that the new rules will be complemented by delegated acts at a later stage, which will notably ensure a balanced review of the Solvency II prudential framework in terms of capital requirements.
The new rules on Solvency II will boost the role of the insurance and reinsurance sector in providing long-term private sources of investments to European businesses. At the same time they will make the sector more resilient and prepared for future challenges in order to better protect insurance policyholders.
The impact of the surcharges on S2 ratios is expected to be minor
EIOPA’s assessment indicates that the equity surcharge would reduce average S2 ratios by less than 100 basis points (bp) in most cases. Norway, with the highest average impact at 173bp, reflects greater exposure to oil companies in insurers’ portfolios.
Even this impact is negligible in solvency terms. Similarly, the corporate bond surcharge would reduce average S2 ratios by less than 100bp, with Italy experiencing the highest reduction at 134bp.
Impact of Fossil-Fuel Capital Surcharges
Equity surcharge
| Country | Average Impact on S2 Ratio (bp) |
|---|---|
| Austria | -3 |
| Belgium | -69 |
| Bulgaria | -17 |
| Croatia | -51 |
| Cyprus | -5 |
| Czech Republic | -73 |
| Denmark | -130 |
| Estonia | -4 |
| Finland | -67 |
| France | -127 |
| Germany | -2 |
| Greece | -22 |
| Hungary | -63 |
| Iceland | -121 |
| Ireland | -32 |
| Italy | -53 |
| Latvia | -42 |
| Lithuania | -16 |
| Luxembourg | -150 |
| Malta | -12 |
| Netherlands | -41 |
| Norway | -173 |
| Poland | -6 |
| Portugal | -8 |
| Romania | -28 |
| Slovenia | -24 |
| Spain | -66 |
| Sweden | -170 |
Impact of Climate-related risks
However, exposure to natural catastrophe risk, which is affected by physical climate change risk, is an explicit input.
Climate-related risks may also affect our scoring of rating drivers outside the model if they are sufficiently foreseeable and material
For example, over-exposure to natural catastrophe risk, and therefore physical climate change risk, could affect our scoring for financial performance and earnings due to claims volatility, and for company profile due to business risk. Over-exposure to real estate investments that are vulnerable to transition risk could affect our assessment of an insurer’s investment and asset risk.
EIOPA’s recommendations will now be reviewed by the European Commission. If the proposed surcharges are implemented, we expect insurers to accelerate the divestment of their already low holdings of fossil fuel-related assets.
FAQ
No, Fitch Ratings expects that European insurers’ ratings will remain unaffected. Insurers have low direct exposure to fossil fuel equities and bonds, minimizing the impact of these surcharges on their financial metrics.
EIOPA has suggested an increase of up to 17 percentage points (pp) to the 39% risk charge for Type 1 equities listed in regulated EEA or OECD markets. For spread risk on corporate bonds, it proposed a supplementary charge of up to 40% in multiplicative terms.
The impact is expected to be minor. The equity surcharge would typically reduce average S2 ratios by less than 100 basis points (bp). The corporate bond surcharge would have a similar impact, with country-specific variations.
Norway faces the highest average reduction at 173bp, likely due to greater exposure to oil companies. Sweden (170bp) and Luxembourg (150bp) also show higher impacts, while most other countries experience reductions below 100bp.
The amendments include new rules on insurance recovery and resolution (IRRD) and assign EIOPA additional tasks to develop technical standards for harmonized implementation. The directive aims to enhance capital requirements and improve the sector’s resilience.
The revised Solvency II rules aim to strengthen the sector’s role in providing long-term investments to European businesses. They will also make the sector more resilient to challenges and improve protection for policyholders.
Climate-related risks, such as exposure to natural catastrophe risk and transition risks tied to real estate investments, may influence rating factors like financial performance and company profile. These risks could lead to volatility in claims or changes in asset valuations.
………………..
AUTHORS: Robert Mazzuoli, CFA – Director, Insurance at Fitch Ratings Ireland, David Prowse – Senior Director, Fitch Wire
