ClientEarth feedback on European Commission Solvency II review proposals

In September 2021, the European Commission issued a package of legislative proposals for amending the insurance prudential regime set out in the Solvency II Directive.

The review of Solvency II provides an opportunity to improve the management of climate-related risks within insurance prudential rules. In this feedback to the Commission, we propose the following:

• Scenario analysis: The Commission’s proposal includes enhanced rules for insurers to conduct climate change scenario analysis. However, more detail is required on scenario analysis requirements, in particular to reflect risks related extreme warming (3°C or more) and disorderly transition, and also long-term risks.
• Double materiality: Insurers should be expressly required to assess and manage the environmental and social impact of their underwriting activities (in addition to managing their exposure to environmental and social risks).
• Capital requirements & fossil fuels: Capital requirements for investments and insurance liabilities related to fossil fuels need to be enhanced as soon as possible, in view of the significant climate-related risks they face. At a minimum, the European Insurance and Occupational Pensions Authority should be directed to fast-track an analysis of the capital treatment of fossil fuels, in order to accelerate the process for amendments to the capital regime.