Leaked proposal on EU insurance capital framework draws criticism

Civil society organisations have criticised proposals for reforming the EU’s capital framework for the insurance industry, accusing policymakers of “watering down climate ambition and delaying the reviewing process”.

Proposals for revising Solvency 2, which aims to ensure resilience from shocks and losses in the insurance industry, were leaked to Politico (paywall). They show that while some demands from climate advocates have been included, others have not been met.

German MEP Markus Ferber, the leading rapporteur on Solvency 2 reform, has drawn particular criticism. Ferber had previously proposed to erase almost all sustainability aspects, including climate-change scenario analysis.

The new proposals are reportedly designed to break a deadlock between members of the Committee on Economic and Monetary Affairs who will vote on the reforms, and include some concessions to environmental concerns. However, he has been criticised for not going far enough and using climate considerations as “trade-offs” to also include massive capital relief for insurers.

Climate advocates welcomed the inclusion of mandatory transition plans. However,  demands for increased capital requirements for new fossil fuel projects have not been reflected in the leaked compromise. On the contrary, Ferber has proposed providing capital relief for insurance companies. This has sparked strong pushback from many campaign groups including ShareAction, WWF, and Urgewald.

Speaking to Green Central Banking, Anna Lena Samborski, insurance campaigner at Urgewald, questioned what she describes as Ferber’s “trade-off” in seeking to use the transition plans as a bargaining chip to also include capital relief.

“It is cynical and unethical to use sustainability measures as broadside leverage for other deregulation demands,” she said. “Amid multiple crises – and the climate crisis in particular – it is most definitely not the time for insurers to get capital relief since risks are rising and increasingly hard to calculate.

“On the contrary, it is more important than ever that insurers hold enough capital to cover large and unexpected losses. Most definitely, we cannot risk a financial crisis on top of the current climate crisis, which would dramatically impact the ability to transition”.

While insurers continue to support fossil fuels projects, Samborski said the general public will “pay twice – as taxpayers and as policyholders – and possibly be ineligible to insure their own homes.

“As it becomes increasingly clear that voluntary climate commitments by the industry are insufficient, it is time to regulate the insurance sector and make it fit for purpose as society’s risk manager in a time of multiple crises. It is especially up to the EU to demonstrate firm leadership in this regard now.”

The insurance sector as a whole is at a significant crossroads amid the climate crisis. The Net-Zero Insurance Alliance has seen major companies withdraw from its membership, while the ECB recently reported that only one-quarter of climate-related catastrophe losses in the EU are currently insured.

“Climate crisis impacts are expected to make whole regions uninsurable,” Samborski said. “While in the USA, insurers are already withdrawing from particular regions, the German insurance lobby association GDV just asked for state provisions in cases of major natural catastrophes related to the climate crisis.”

Meetings discussing the proposed compromise are ongoing, with a vote potentially happening as soon as next week.

Solvency 2 entered into force in January 2016 and is now under review in the UK as well as in the EU.

13 July 2023 – this story was amended to reflect that Ferber’s proposals are to provide capital relief for the insurance industry as a whole, not just to those involved in fossil fuels projects as previously stated.