The Association of German Public Insurers (VöV hereafter, Verband öffentlicher Versicherer) welcomes the consultation on the role of sustainability within Solvency II. As Germany’s second largest primary insurance provider with a strong regional presence, the group is committed to constructive dialogue in the interests of all market participants and of a stable European and global insurance sector.
General remarks on underwriting practices
EIOPA’s conclusion that the majority of undertakings currently do not explicitly take sustainability risks into account in their underwriting policies might be misleading in our view. First, the risk-based assessment and risk-based pricing already captures several ESG risks, for instance the transition risk of fossil energy sources. Second, undertakings implicitly subsume a number of sustainability risks in the category of reputational risks. The VöV therefore concludes that market driven factors have already led to an extensive inclusion of sustainability risks into the underwriting policies. This development will continue at an even higher pace in the future and mandatory requirements will not be necessary to reinforce it.
The VöV supports the initiative to develop voluntary and market driven approaches to incorporate ESG criteria into the business models of insurers. While the role of sustainability in investment has grown considerably in the insurance sector in the past years, its role in underwriting is still in its infancy for many insurers, in particular small and medium ones. Guidance on a holistic treatment of ESG risks is therefore very welcome, whereas mandatory and inflexible rules would potentially exclude entire sectors from insurance coverage, with substantial negative effects on jobs, regions and growth.
In particular, the VöV supports an open approach that allows for sufficient flexibility in strengthening ESG considerations in the underwriting process on a voluntary basis. This openness is essential to help insurers of all sizes to succeed in this endeavour. Rigid rules would be a significant burden for smaller companies and proportionality will be a key factor for the progress of the initiative.
The VöV advocates an approach that considers all risk appropriately in two separate steps. Whereas financial risks are decisive in the underwriting process, ESG risks are relevant for an ESG assessment. To ensure a proper treatment of these different risks, we suggest not merging the two different processes. Underwriting comprises the economic calculation of premiums on a market and risk basis. It is essential for a financially viable business model of insurers and should not be overburdened. In a second step, ESG criteria should be analysed to see if a project complies with the ESG standards of the insurer and whether it should be insured also from this prospective. We refrain from mixing economic pricing mechanisms and political ESG considerations. Furthermore, insurers need to take decisions not to insure companies due to ESG-reasons with great care. Failing to be insured (fire insurance, liability insurance, etc.) has serious consequences on companies, their financing, employees and their regions. An ESG-mark-up would not be a serious option either. On the one hand, this implies a higher premium that is not based on risk considerations. On the other hand, it does not lower the potential reputational damage of the insurer in case an ESG-risk materializes.
The VöV therefore opposes any attempt to exclude entire industries from insurance coverage or the increase of premiums. This would be an unjustified and unproportional intervention into the business models of insurers with significant consequences on the companies in question, their employees, value chains, regional economies and tax earnings. An ESG-assessment must take these factors and implications on companies, jobs and growth into account as well.
