Avoid new double regulation - insurers see no added value in sustainability risk plans
EIOPA has presented draft rules for the implementation of mandatory “Sustainability Risk Plans”, which are to be introduced as part of the Solvency II Review. From the industry’s point of view, this is not reasonable. After all, the new plans include many aspects that are already covered by existing risk management requirements for insurers. In addition, the plans lead to further overlaps with requirements from horizontal sustainability frameworks such as the CSDDD and the CSRD.
Weak economic growth and geopolitical challenges are prompting the new Commission under President Ursula von der Leyen to focus the political agenda more on competitiveness. Reducing the regulatory burden on companies is a central component of the Commission's Competitiveness Compass - an important part of its work programme for the current legislative period. The aim is to reduce the burden on companies by 25 percent. Recently, the Commission proposed the first of three omnibus legislative packages to ease the burden stemming from sustainability reporting (CSRD), due diligence obligations (CSDDD) and the Taxonomy Regulation.
EIOPA consults on RTS for sustainability risk plans
While the Commission is proposing simplifications on the one hand, additional requirements are being introduced on the other. At first glance, this appears paradoxical. However, the reason is that changes in political priorities have a delayed impact on the technical level of EU regulation.
One example of this are the draft Regulatory Technical Standards (RTS) on the management of sustainability risks, which the European Insurance and Occupational Pensions Authority (EIOPA) consulted on until the end of February. The legal basis for the new requirements is Article 44 of the revised Solvency II Directive from November 2024, which requires insurers to prepare a sustainability risks plan. In the draft RTS, EIOPA proposes specific requirements for these plans that include:
- Governance arrangements and strategies for identifying, assessing, managing and monitoring material sustainability risks (ESG) for the business
- Materiality analysis for all sustainability risks with a large number of minimum key figures to be considered
- Scenario analysis of the material financial risks
- Explanation of the results and key risk figures based on various scenarios and time horizons
- Quantifiable short, medium and long-term targets and suitable measures for managing the material risks
EIOPA expressed concerns about sustainability risk plans early on
During the review of Solvency II, the question arose as to what added value these sustainability risk plans would bring for insurers and supervisors. In June 2023, EIOPA Chair Petra Hielkema expressed her reservations about the introduction of additional sustainability risk plans (then known as transition plans for prudential purposes): "There has been so much put in place now with greenwashing, with new rules in Solvency II, the ORSA, Sustainable Finance Disclosure Regulation (SFDR), the taxonomy and the CSRD. Let's use the information we have today, let us see what that brings us and let's monitor how that works.”
No added value from insurers' perspective
From the perspective of the GDV and the European association Insurance Europe, the new sustainability risk plans should be deleted from Article 44 of the amended Solvency II Directive. This could be implemented swiftly as part of the current omnibus legislation.
In fact, the sustainability risk plans do not create any added value, but above all new, costly duplicate structures. As risk management is a core component of the insurance business model, there are already extensive regulatory requirements. In general, all material risks for the company must be included in the company's own risk and solvency assessment (ORSA). Sustainability risks in particular are already adequately taken into account in Solvency II. Insurers have been conducting scenario analyses on climate-related risks since 2022 (see GDV publication: Climate change scenarios in ORSA). With the current Solvency II review, these scenario analyses will become legally binding.
The sustainability risk plans also overlap with requirements from horizontal sustainability regulations. These include the obligation to prepare climate transition plans in accordance with the CSDDD and mandatory sustainability reporting in accordance with the CSRD and the ESRS (incl. materiality analysis with double materiality).
Let insurers do their job
Risk management is at the core of insurers’ business model. At the end of the day, insurers have to bear the consequences of their (risk) management decisions with their own funds. This is why insurers already have a sophisticated risk management system in place and take comprehensive ESG criteria into account in their investment and underwriting decisions (see GDV-Sustainability Report 2024, p. 8).
Smart ESG risk management, especially of climate risks, will become even more important in the future, as physical risks will continue to increase as climate change progresses. Proportionate and focussed sustainability reporting can also help to make risks more transparent and manage them even better.
