The European Insurance and Occupational Pensions Authority’s proposed sustainability risk rules would duplicate existing regulations and increase costs without offering clear benefits, according to trade group Insurance Europe.
The European Commission stated that the new rule builds on current requirements, incorporating sustainability risk into established risk management practices.
It also addresses potential risks that may arise during the transition to updated regulations. Additionally, the rules aim to standardize sustainability risk disclosure for greater consistency and efficiency.
The draft regulations set minimum standards and methods for identifying, measuring, managing, and monitoring sustainability risks, as outlined by the commission.
The industry proposes the following changes to the SRP proposals to align which will reduce operational and reporting burdens, consistent with the Commission’s Omnibus initiative to cut red tape and simplify EU rules for citizens and business:
- Limit minimum standards to climate risks: The requirements in the updated Solvency II Directive covers ESG factors but does not mandate minimum standards for all ESG areas. Social and governance risks lack established methods and metrics, making prescriptive requirements impractical.
- Align with existing frameworks: Any new requirements must be consistent with established regulatory obligations – such as CSRD, ESRS, ORSA and Pillar 3 reporting – to prevent duplication and inefficiencies.
- Ensure full proportionality: Proportionality must apply to all undertakings, not just small and non-complex ones (SNCUs).
- Address implementation challenges: Inconsistencies in time horizon definitions, misalignment with Solvency II risk categories, data limitations, ESG measurement difficulties, and diverging third-country disclosure approaches create confusion and should be resolved
- Revise proposed metrics: The proposed minimum metrics are too extensive and misaligned with insurers’ risk profiles.
- Set realistic sustainability targets: Targets should align with risk appetite and strategy, focusing on managing rather than mitigating material risks, while remaining flexible and business-specific.
- Avoid rigid application guidance: Non-binding EIOPA guidance should not become de facto binding rules, ensuring insurers retain flexibility in risk management.
Insurance companies support the commission’s sustainability goals. However, Insurance Europe argues that existing Solvency II regulations, enhanced in 2022, already ensure effective management of insurers’ sustainability risks.
Offering counterproposals, Insurance Europe suggests limiting minimum standards to climate risk, aligning new rules with existing frameworks, and applying regulations proportionately regardless of an organization’s size or complexity.
The trade group also criticizes the proposed metrics as overly extensive and inconsistent with insurers’ risk profiles.
They recommend focusing sustainability targets on managing material risk, rather than mitigating it, while remaining aligned with a company’s risk appetite and strategy.
Insurance Europe further argues that rigid application of the European Insurance and Occupational Pensions Authority’s guidance should be avoided.
The group emphasizes that non-binding guidance should not become de facto binding rules, preserving insurers’ flexibility in risk management.
In July 2024, Insurance Europe stated that climate change was a key priority, but cautioned against excessive reporting and regulatory requirements that overly emphasize sustainability.
Insurance Europe has called on the European Commission to ensure that the forthcoming technical work on Solvency II – the EU’s prudential regime that regulates the industry – fully reflects the political agreement made in December 2023.
The federation of insurance associations welcomed the changes agreed by the EU co-legislators that reduce current excessive solvency requirements and unlock capital.
This increases the capacity for the industry to provide more protection for citizens and businesses and investment into the European economy.
Delivering on the agreed ambitions for the Solvency II review, published just before the European Parliament’s plenary vote on the topic led by rapporteur Markus Ferber MEP, Insurance Europe outlines the key outcomes needed and their benefits.
The document explains the industry arguments and expectations on key points such as:
- Treatment of long-term business: The industry continually raised concerns about the excessive capital requirements and volatility associated with long-term products. The EU’s co-legislators recognized these concerns and agreed to address them primarily through amendments to the risk margin and the volatility adjustment. The technical details underlying these mechanisms and the extrapolation of risk-free rates should be chosen to avoid additional volatility in the framework.
- Equity investment: The industry welcomes the inclusion of workable and simplified criteria for long-term equities. These should be complemented with Level 2 provisions that mirror the co-legislators’ ambition and ensure a smooth and extensive usage of the classification.
- Proportionality: Improving proportionality was one of the primary aims of the review. It has been partially achieved for very small insurers by raising the thresholds for the application of Solvency II and allowing small insurers – fulfilling a set of predefined criteria – to automatically benefit from simplifications and proportionality measures.
- Reporting and disclosure: Unfortunately, despite the European Commission’s broad initiative to reduce reporting burdens by 25%, for most insurers there will be a net increase in operational and reporting requirements. Therefore, Level 2 needs to minimize additional reporting and other regulatory burdens.
- Sustainability: European insurers strongly support the drive towards sustainability and are ready to build on their current actions to contribute further to the transition to a more sustainable society and to play their role in achieving the targets of the EU Green Deal. However, as Solvency II and other cross-sectoral regulations already cover many aspects of sustainability, it is important to avoid creating overlaps and inconsistencies that can create confusion and unnecessary costs and operational burdens.
