Investment in fossil fuels could have additional costs for insurers in the EU

The insurers could be penalized by invest in companies of fossil fuelsaccording to plans that EU regulators will discuss this Tuesday and Wednesday in Frankfurt.

The measure could mean a turning point in recognition of the risk posed by climate change in it financial sectorin an industry that often has to bear the cost of damage caused by floods and forest fires.

The new regulations of insurance of the EU (politically agreed last December and now waiting to be formalized in the statutes) establishes that insurers must take into account the damage that its assets mean for the society or the environmenthighlighting investment in sectors such as oil, gas and coal.

Marika Carlucci, head of ShareAction in the EU, explains to ‘Euronews’ that the objective of Solvency 2 is “assess and manage risks“, and that the next transition, which will involve abandoning fossil fuels, means that there is a great risk on the horizon.

The assets linked to carbon intensive sectors “they run the risk of lose value quickly” as regulation creates a net-zero economy, Carlucci said, adding: “If the value suddenly plummets, this can cause financial instability“.

The meeting takes place a week after the heavy rain will cause widespread floods and force mass evacuations in central Europe, which some have linked to climate change.

Increasingly extreme weather events are raising fears of an “insurance protection gap” in which some parts of the world become not insurable and therefore potentially uninhabitable.

40% increase

In December, the European Insurance and Occupational Pensions Authority (EIOPA) proposed increasing up to 40% capital requirements for insurance companies exposed to bonds fossil fuels.

In the case of the actionsthe precautionary requirements would increase to a 17%which would make it less profitable for insurers to buy stakes in companies like Shell or ExxonMobil.

“Climate change introduces transition risks related to the decarbonisation of the real economy,” the EIOPA consultation paper states, citing the risk of “locked assets“, that is, investments that are not adapted to a world without fossil fuels.

EIOPA’s national supervisors are not so sure and, as early as June, expressed their worry for the possibility that the plan will discourage the investment. Now they are back at it, and supporters of change hope that this time they will agree.

“We hope that (the supervisors) support the EIOPA report”, particularly with regard to fossil fuel assets, Julia Symon, head of research and advocacy at the Brussels-based non-profit organization Finance Watch, told Euronews.

Analysis based on the past

Symon rejects concerns about double counting of risk but says existing methods cannot cope with a single event unprecedented such as the future elimination of fossil fuels.

“Insurers’ models are not adapted to what is to come; they base their analyzes on the extrapolation of the past,” says Symon, who argues that a clear EU position would lead to a robust and coherent treatment.

Whatever EIOPA agrees to, it will then be up to the European Commission judge how to translate it into legislation. President Ursula von der Leyen has tasked Maria Luís Albuquerque, Portuguese commissioner in charge of financial services, with ensuring that the EU remains a “world leader in sustainable finance“, but has also asked him to reduce unnecessary or incompatible regulations that impede competitiveness, following the series of measures on green finance that have come out of Brussels.

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Both Symon and Carlucci are keen to point out that the impact in the results of the insurers would probably be minimum. EIOPA calculations suggest it will change solvency ratios by a few percentage points, when in reality most insurers are two or three times above their regulatory minimum levels, Symon said.

However, “it is a sign that there is a risk, the first recognition that it is risky“for insurers invest in companies whose business model could be on the way to disappearanceSymon said.

“We don’t really see this compromising competitiveness,” Carlucci said, adding: “It will make insurers more competitive and will ensure that your business is resistant in the future”.