'Eiopa should introduce sustainability in Solvency II' - Aviva’s Waygood

Channels: SAA/ALM, Outsourcing, Risk, Governance, Regulation

Companies: Aviva Investors, Eiopa, European Commission

People: Steve Waygood

It is time for regulators to use all the tools at their disposal to address the risks climate changes pose to the financial stability of the insurance industry, Aviva Investors chief responsible investment officer Steve Waygood has warned.

In an exclusive article published by Insurance Asset Risk, Waygood argued the insurance industry needs regulatory action on climate change.

“At present, Solvency II only indirectly addresses climate risk,” he wrote. “It does little to encourage individual insurers to decide whether to include climate risk in their risk frameworks, or to include climate risk within their Own Risk and Solvency Assessments (ORSAs), under Pillar 2.”

“Nor does it encourage insurers to disclose climate relevant information under Pillar 3. Since climate change is a longer term, external risk, it will not necessarily be explicitly picked up in the content insurers choose to include in their ORSAs.”

There are a number of relatively straightforward ways in which the European Commission could begin to address the interrelated issues of how insurers protect policy holders and beneficiaries against climate risk and are encouraged to invest in long-term sustainable projects, according to Waygood.

In his article he lists some of the actions the European Insurance and Occupational Pensions Authority (Eiopa) could take to introduce sustainability through all three pillars of Solvency II.

These include, but are not limited to, a review of capital charges on more and less sustainable investments, developing a range of core climate stress-testing scenarios insurers can use to assess the climate risks they are exposed to. He also suggested insurers provide asset reporting that is aligned to the taxonomy decided by the EU.

The proposals set out in the article are not the final word in addressing this issue, Waygood tempered, arguing other ideas and voices are essential to finding and constructing effective solutions.

“As insurers and investors, we are in the eye of the storm,” he concluded. “We have an obligation to shareholders and to society beyond to be far-sighted on the issue and advocate for a prudential regulatory regime that is fit for purpose on climate risk.”

 The full article is available on Insurance Asset Risk’s website.