EU lawmakers seek climate capital requirements for insurance firms

Climate-adjusted capital requirements could be applied to European insurers if lawmakers are successful in a bid to amend new legislation.

The European Parliament’s economic and monetary affairs committee (ECON) is currently reviewing proposed reforms to Solvency 2, the EU’s regulatory regime for the insurance sector. An amendment put forward by a cross-party group of parliamentarians would see climate-related risks specifically included in the calculation of the amount of funds firms must hold.

Under a separate proposal, insurers would be required to set out transition plans towards alignment with the EU’s climate goals. Significant divergences from the plans would have an impact on that firm’s capital requirements.

The EU is planning to overhaul its capital rules for insurers in a move it says will increase the resilience of the sector and release hundreds of billions of euros in investment for the green transition. But climate groups have warned the current plans do not go far enough to address the mounting sustainability risks facing the industry.

ShareAction, Finance Watch and 12 other organisations wrote to EU policymakers last month to warn of the impossibility of precisely measuring climate-related risks due to their forward-looking, non-linear and uncertain nature. The letter called for mandatory transition plans for insurers, adding that the plans should be subject to supervisory scrutiny.

The letter said transition plans should be complemented by robust capital requirements to cover potential future losses, in particular resulting from the financing of fossil fuels. It said the combination of transition planning and associated supervision could see financial institutions guard against future risks and play a bigger role in channelling finance at the same time.

The amendments will face a vote in the 61-member ECON committee. The original text and the amendments, including any potential compromise amendments agreed by political groupings, will then be voted on by the full committee. The report adopted by the committee will then be submitted to the plenary for approval.

The amendment to introduce climate-adjusted capital requirements enjoys a degree of cross-party support, with Paul Tang of the Socialists and Democrats group and German Green party representative Henrike Hahn among its backers.

The UK is planning its own overhaul of the Solvency 2 regime, which it inherited while a member of the EU. The government says it wants to relax capital rules to improve the competitiveness of the sector and boost investment, but campaigners have warned that the current framework fails to capture climate risks, a problem which the proposed reforms will do nothing to address.

Research by ShareAction published in June found that many of the world’s largest insurers, including founding members of the Net Zero Insurance Alliance, are channelling billions into new fossil fuel projects.

“With insurance regulation Solvency 2 up for review in both the UK and the EU, policymakers have a unique opportunity to inscribe the necessary sustainability requirements into law,” wrote policy officers Caroline Metz and Isabella Salkeld.