EU committee agrees on mandatory transition plans and capital relief for insurers

Lawmakers in the European Union have voted to include mandatory transition plans for insurance companies in the region, but the Solvency 2 proposal also includes capital relief which, according to WWF, will be “giving insurers a free pass to make financially risky investments in areas such as new fossil fuels”.

The Committee on Economic and Monetary Affairs endorsed the compromise that will initiate negotiations with member states to finalise the legislation. The most controversial amendment that has been approved concerns capital relief for insurers. The changes mean that the law will not require insurers to set aside additional capital when investing in projects, such as environmentally-harmful projects.

Markus Ferber, lead rapporteur of the proposal, said that the capital relief changes “will allow insurance companies to invest in the green transition without putting clients at risk”. Caroline Metz of ShareAction, argued however that “we need to see less capital relief, less exemptions, and much more robust sustainability measures for insurers. For example, ‘one for one’ capital requirements to disincentivise investment in new fossil fuel projects, and the introduction of mandatory stewardship so insurers systematically drive their investee companies towards more sustainable business models.”

Industry leaders have also expressed disappointment. Olav Jones of Insurance Europe called it a “missed opportunity” for the insurance industry to deliver more for European consumers. The provisions on capital relief go beyond what the European Insurance and Occupational Pensions Authority (EIOPA) have advised.

Julia Symon, head of research and advocacy at Finance Watch said that “more work needs to be done to ensure capital requirements account for climate-related risks, such as the risks of fossil fuel exposures which are certain to lose their value in the sustainable transition. Investments in fossil fuels are incompatible with the insurer’s long-term view on risk”.

Civil society organisations previously criticised Ferber for using climate considerations as “trade-offs” to include capital relief. Some of those climate considerations were passed, including mandatory transition plans for insurers and the publication of stress test outcomes. Improving gender-balanced representation within insurers’ governance structures was also passed in yesterday’s vote.

WWF welcomed the transition plans, which are based on disclosures from the Corporate Sustainability Reporting Directive. Henry Eviston of WWF Europe said: “The requirement on insurers to set up transition plans is an important step but it is just the start. The EU must make sure these plans include short-term targets that are truly in line with the Paris Agreement and that insurers actually follow them – or face regulatory consequences from supervisors.”

Another element of the proposal that passed was handing EIOPA a mandate to adopt a precautionary approach to adjust capital requirements for crypto-asset exposures. “This is an important precedent for emerging risks, to ensure that the framework is able to look beyond historical data and properly capture these risks,” said Finance Watch.

An amendment that called for sustainability-linked remuneration was rejected. This aimed to ensure that at least half of the variable component of the insurer’s remuneration scheme would be linked to the achievement of the targets set as part of its transition plan.

WWF argues that the Parliament has “introduced a major loophole by not requiring insurers to manage ESG risks linked to activities they insure. The new compromise only requires insurers to address the risks arising from their own investment portfolio – even though insurance is the main reason that insurers and reinsurers exist and this side of the business is increasingly affected by payouts for floods, wildfires, droughts, and other environmental risks.”

Solvency 2 entered into force in January 2016. Following the adoption of the proposal, trialogue negotiations between the European Parliament, the Council of the European Union and the European Commission will now follow with the objective of attaining a conclusive agreement among the co-legislators before the end of the current legislative mandate.