The Association of German Public Insurers (VöV) welcomes EIOPA’s discussion paper on the “Prudential Treatment of Sustainability Risks”. As Germany's second-largest primary insurer with a strong regional presence, the group supports the goal of a more sustainable economy. All public insurers are signatories to the Principles for Responsible Investment (PRI) and follow environmental, social and governance criteria in their investment decisions. More than half of them are furthermore members of the Net-Zero-Asset Owner Alliance (NZAOA). All German Public Insurers commit to the ambitious sustainability position of the German Insurance Association (GDV).
General Comments
VöV welcomes EIOPA’s risk- and evidence-based approach on sustainability. German Public Insurers have repeatedly outlined that capital requirements strictly need to be risk-based. The introduction of a “green supporting factor”, in effect lowering the capital requirements for environmentally sustainable investments, has been suggested repeatedly during the debate on Sustainable Finance. VöV explicitly rejects this proposal in this form. Capital requirements serve to strengthen financial stability and they are based on the risks of an investment. Classifying an investment as environmentally sustainable gives no indication as to the risks of a project. German Public Insurers are also categorically opposed to increasing capital requirements for economic activities that are classified as not being environmentally sustainable (“brown penalizing factor”). There is no evidence that long-term sustainability transition risks are related to short-term, one-year market risks as assumed under Solvency II. On the investment side, it makes more sense to promote a long-term exit from carbon-intensive industries. The existing measures (especially SFDR and IDD) are sufficient for this. Transparency alone creates incentives to become climate-neutral in the long term. In addition, the German insurance industry, for example, has already sufficiently addressed the issue through corresponding voluntary commitments, so that no additional control mechanisms are necessary. Besides risk considerations, increased capital charges for these activities would be an obstacle for their transformation to more sustainable projects.
German Public Insurers share EIOPA’s assessment that “Solvency II can manage sustainability risks within its conceptual structure". They have provided their expertise on sustainability within Solvency II already at an early stage . Sustainability risks are part of existing risk types and should therefore be considered with existing risk management tools. Additional tools are not required. The increase in sustainability risks is therefore best managed by consequently applying the existing risk management systems. High quality ESG-data is key for this endeavour and VöV supports EIOPA’s and the EU Commission’s work on this topic, in particular the creation of the European Single Access Point (ESAP) . It ideally will provide all necessary sustainability data.
Apart from the data, an ambitions CO2-pricing in the real economy is also lacking in order to manage sustainability risk. A significant CO2-price for all sectors with a clear development path would be the most efficient instrument to reduce transition risks. Political and regulatory uncertainty are the main cause for transition risks and financial market actors as well as regulators and supervisors should have a strong voice advocating for CO2-pricing.
VöV fully supports EIOPA’s considerations on climate change adaption and prevention. German public insurers, who have the highest market share for property insurance in Germany and thus a large exposure to NatCat risks, are very active in preventive measures. Besides private initiatives from insurers as well as insured parties, there is also a need for public action, in particular closing the protection gap. The higher the insurance coverage for climate risks is, the better preventive measures
are able to reduce these risks and protect people and properties. The ongoing political discussions and initiatives clearly show the expectation that insurers contribute with their underwriting practices to enhance climate change adaption for people and economy. In the debate VöV urges for realistic expectations on the role of insurers, who can act rather as an enabler than as driver in the transition. In particular, public insurers like to stress the importance of the political framework, for instance the ambitions CO2-pricing mentioned above, that is necessary for insurers maximize their positive contribution.
Specific Comments on the Questions of the Consultation
German Public Insurers have contributed to the comments of the GDV as well and focus on specific aspects that are most relevant for the business models.
Assets and Transition Risk Exposures
Q1: Are there any specific data sources that might be useful for a historical analysis of transition risk for private and public equity and debt? How can EIOPA access them? Why are they relevant?
The reporting templates of the Principles for Responsible Investment already comprise voluntary disclosures on transitions risks. As from the template 2023 (to be published end of January 2023), they might become mandatory. The PRI signatory reports and the PRI database might be a powerful resource for EIOPA. In any case, there should be an alignment between the approaches of EIOPA and PRI to ensure comparability and consistency.
Q12: Would you have other ideas how to quantify transition risk per NACE code?
German Public Insures support the approach to use the NACE code as basis to quantify transition risks. With the climate policy relevant sectors (CPRS) as starting point, the stress testing exercise could be used to narrow down sectors with transition risk. Out of the resulting sectors, there should be a further differentiation between companies according to their greenhouse gas (GHG) intensities. This should on the one hand foster the sustainable transformation and on the other hand support firms in risky sectors that have already reduced their exposure to transitions risks.
Q13: Would you have suggestions for sector definitions other than by NACE code? What are their advantages? How does one quantify their transition risk?
VöV encourages using NACE codes.
Q15: Do you have any comments on the company-specific transition risk measures set out in this chapter? Are there other ones? If so, what are their advantages?
As outlined in Q12, VöV supports the approach to take CPRS sectors as basis for EIOPAs analysis and use stress tests to narrow them down to identify sectors with high transition risks. The final assessment of company should then be based on the GHG intensity compared to the average of the sector.
Q16: Do you agree with focusing on greenhouse gas (GHG) emission intensities rather than on absolute GHG emissions? What is your view regarding the scope of emissions to be used (1, 2 or 3)?
In terms of data availability, absolute emissions and intensities are comparable. Before the full application of the Corporate Sustainability Reporting Directive (CSRD), insurers have to get these data from external providers any way. As GHG intensities do not discriminate small and medium-sized investee companies, they are the preferred option. As for the scope of emissions, scope 1 is sufficient as a starting point. For scope 2 and 3, data availability as well as quality is still insufficient. Once ESAP is fully operational, a potential extension to scope 2 could be evaluated.
Q18: Do you consider it preferable to combine the CPRS classification (Battiston et al. (2017)) with the use of asset shocks (e.g. DNB stress test) to differentiate assets according to their transition risk exposure or should only the latter be used? Why?
As outlined before, EIOPA should narrow down the CPRS sectors by a stress test, for instance the one of DNB. In this very dynamic environment, this would serve as a safeguard not to include sectors that have reduced their transition risks already.
Q26: How should the thresholds to separate lower, medium and higher transition risk sectors be chosen?
This question cannot be answered separately from other aspects. The definition of transition risk sectors is only the first step. The next one is the definition of transition risk companies within these sectors. And the next step is the decision on the prudential treatment of these assets. Less favourable treatment for high transition risk investments and more favourable treatment of assets with low risks should be balanced. So, thresholds and prudential treatment must be considered jointly.
Q28: Do you have any comments on the advantages and disadvantages regarding both the sectoral and the firm-level classification approach?
VöV agrees with EIOPA’s assessment. However, the firm-level classification is not necessarily more complex if it is based on a single metric like GHG intensity.
Q29: What approach should be preferred? Why?
German Public insures suggest combining the advantage of both approaches: taking the sectoral classification as starting point and refining it by classifying firms in terms of the GHG-intensity as one simple indicator.
Underwriting and Climate Change Adaption
Q67: Do you have comments on the expected conceptual impact of adaptation measures on premium, reserve and natural catastrophe risk in Solvency II?
German Public Insurers share EIOPA’s assessment on the matter. Furthermore, we suggest a simultaneous analysis of adaption measures on the premium risk on the one hand and natural catastrophe risk on the other hand. This would allow a more holistic view on insurers’ total risk exposure. This approach would be more consistent and provide a differentiation of the impacts of adaption measures on each type of risk. The joint analyses will provide synergies and VöV considers an ambitious approach including both aspects as superior to starting with premium risk only.
Q69: Do you have evidence on the impact of climate-related adaptation measures on premium risk?
VöV sees prevention of sustainability risks as a crucial factor. Although we do not have direct evidence on the impact of climate-related adaptation measures on premium risk, German public insurers support EIOPA’s efforts to investigate the matter more closely. Preventive measures include both, preventive measures by the public sector (dikes, dams, retention areas for flood protection) and preventive measures by homeowners (e.g. flood-adapted and heavily rain-adapted construction). The key to sustainable, stable underwriting lies in the close interaction of risk transfer through the protection by insurance and sustainable risk reduction through prevention. German public insurers are very active in preventive measures. They actively work to improve public safety, for instance by outfitting fire brigades with technical equipment or participating in fire safety education in kindergartens and schools. They also regularly work together as a group for the common good, for instance in the development of innovative loss prevention techniques such as disaster warning systems for the general public.
Tor enhance climate-related prevention measures, it is furthermore necessary to improve risk awareness among the population. Making risks more transparent and creating awareness of owners of previously uninsured properties are essential to strengthen prevention and adaption as well as limit a potential protection gap for these hazards.
Q70: Do you have comments on the proposed methodology to study the potential impact of climate-related adaptation measures on premium risk under Solvency II’s Standard Formula?
German Public Insurers support the approach to compare underwriting pools with and without climate-related adaptation and prevention measures.
VöV is looking forward to exchanging on sustainable finance and will be happy to assist in case of further inquiries.
