Update: Prudential Treatment of Sustainability Risks


The Association of German Public Insurers (VöV) welcomes EIOPA’s consultation paper on the “Prudential Treatment of Sustainability Risks” and the opportunity to provide its expertise. As Germany’s second largest primary insurance provider with a strong regional presence, the group is strongly committed to the goals of a more sustainable economy. The Public Insurers are signatories to the Principles for Responsible Investment (PRI) and take environmental, social and governance principles all into account with regard to their business decisions.

General Comments
VöV welcomes EIOPA’s risk- and evidence-based approach on sustainability. German Public Insurers have repeatedly outlined that capital requirements strictly have to be risk-based. Public Insurers agree with EIOPA that the "availability of sustainability-related data is still a material challenge". This applies to supervisory authorities as well as insurers. VöV expects the availability and quality of sustainability-related data to improve significantly with the full applicability of the Corporate Sustainability Reporting Directive (CSRD) and the implementation of the European Single Access Point (ESAP). For the time being, Public Insurers consider the limited evidence in the data and time series available as insufficient to justify changes in the pillar 1 instruments. This argument also applies considering the marginal exposure to fossil fuel investments (0.9 percentage of all equities, corporate bonds, and funds for German insurers) and the negligible impact on solvency ratios (0.02 percentage points or less). A change in the treatment of fossil fuel stocks or bonds would neither trigger any allocation changes nor improve financial stability.

In the context of improved data availability and quality, the association encourages EIOPA to continue its valuable work assessing the potential for a dedicated prudential treatment of assets or activities associated substantially with environmental or social objectives.

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. For other questions, we refer to the response of GDV.

Q1: What are your views regarding the analysis of equity and spread risk?
The Public Insurers support the evidence-based analysis with market data as the basis and the complementary forward-looking scenario analyses as an additional plausibility check. As forward-looking models are heavily dependent on assumptions and therefore not suitable for an evidence-based approach. In the following, Public Insurers identify several methodological aspects and inconsistencies that can be further improved.

  • Consistency with the Solvency II standard formula
    In the Solvency II standard formula, capital charges for equities are derived on basis of data of the entire market. An increase of charges on one or several sectors must imply an immediately decrease for other ones to be still in line with the calculation for the market as a whole. Consequently, for an investor with average market exposure, the end result should be the same. A decision must be made as to whether to retain the system of average risk or fine-tune it at sector level. However, it is inconsistent to link the two.
  • Unsubstantiated conclusion from VaR to transition risks
    Table 4 shows the VaR for several sector in three periods: GFC (2006 – 2009), Normal Times (2010 – 2018) and Covid Period (2019 – 2021). Except for the relatively short period of Covid, the finance sector exhibits a larger VaR than fossil fuels. The conclusion that the high VaR means a transition risk for fossil fuels, but not in the finance sector, is arbitrary and more of a hypothesis than evidence.
  • Limited usability of the NACE classification
    As mentioned in paras 77 and 78 of the consultation paper on the usage of NACE sectors, “there are also some drawbacks to this high-level classification”. A fair representation of transitions risks would require an analysis on the level of the business activities. However, such specific data are generally not available. Another problem with the NACE code is the lack of standardisation. This means that Public Insurers typically receive a different quality from suppliers. If EIOPA wants to build on this, companies should be obliged to officially assign a NACE, comparable to the Legal Entity Identifier (LEI). This could be linked to the LEI assignment. The Complementary Identification Code (CIC) could then also be integrated. This allows for a standardised database. Otherwise, insurers would have to rely on external data provider to screen their lists of assets. With around 200,000 items that Public Insurers typically have currently in the list of assets, this would generate disproportionately high costs.

Q3: What is your view on the proposed policy options on introducing a dedicated prudential treatment regarding equity risk?
In line with the answer to question 1, Public Insurers strongly recommend option 1.

Q4: What is your view on the proposed policy options on introducing a dedicated prudential treatment regarding spread risk?
In line with the answer to question 1, Public Insurers strongly recommend option 1. VöV is looking forward to exchanging on sustainable finance and will be happy to assist in case of further inquiries

Contact Persons

Dr Christian Schwirten 
Head of Department Political Affairs

T+49 30 22 605 49-22


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