Banking and finance in stressed times: insurance regulatory framework for sustainability risks and factors
By Pilar Perales Viscasillas, Chair Professor of Commercial Law (UC3M)
To talk about the complicated landscape that the insurance sector has ahead of it in relation with the insurance regulatory framework for sustainability factors and risks, particularly climate change, I had the pleasure to moderate one of the panels of the International Conference ‘Banking And Finance In Stressed Times: Climate, Resilience And Exit’, that was held on the 11th of May at Universidad Carlos III of Madrid.
The speakers Michele Siri, University of Genoa & EBI & Chairperson, Joint Board of Appeal, European Supervisory Authorities, and Ramón Carrasco, Chief Risk Officer, MAPFRE, offered their vision of the important role that the insurance and pensions sector can play in the mitigation and adaptation to climate change or sustainability risks, through their investments, products and services. In fact, one of EIOPA ́s priorities for 2022–2024 is to address sustainability risks and as such integrating sustainability considerations in the behaviour of consumers and insurance and pensions companies with the aim to contribute to better risk management.
Michele Siri focused on climate change as a source of financial risk and the need for an appropriate allocation of oversight and management responsibilities. To that end, he considered that climate change will have wide–ranging impacts on the structure and functioning of the global economy and financial system. Furthermore, within the insurer’s governance framework the relevant roles and responsibilities assigned to the Board, Senior Management and Control Functions should continue to adapt to the evolving risks, including climate risk. The Board has a role in maintaining effective oversight of climate–related risk management, including incorporating climate–related considerations into the insurer’s risk appetite, strategies and business plans.
He also discussed the main reasons of the integration of sustainability within ORSA and in the EU Solvency II framework and the status of the review of the Solvency II Directive in particular in the light of the draft report published on 6th June 2022 by the rapporteur of the European Parliament for the Solvency II.
Michele also considered several important questions and discussed them during the panel such as: insurance gaps, whether the sustainability–oriented amendments represent a significant change to the overall objectives of the Solvency II framework, to what extent is necessary to review the prudential treatment of sustainability risks, and finally if the relationship of an insurance undertaking towards its policyholders/beneficiaries will evolve into a “fiduciary relationship” and shall supersede the “duty of care” .
Ramón followed up on the different aspects of the insurance regulatory framework from a more practical perspective pointing out to the increasing investors and stakeholders demands. At the same time, regulators, particularly in Europe, are putting a lot of pressure in insurance companies: from greenwashing, to reporting obligations, and increasing duties on the boards. Further, the integration of ESG risks in all the pillars of the prudential framework of insurers and hence the need of the revision of Solvency II is one of the critical issues. Ramón considered that although presently is clear that the emphasis is being put on climate related risks which is an emerging risk different to natural disasters, there are other emergent risks to be taken into account such as cyber, artificial intelligence and geopolitical risks. Besides, he reflected on several important aspects: whether standard scenarios are enough instead of special tailored ones, the climate change risks versus climate risks, and the ESG metrics and ratings.
He also referred to the challenges of integrating climate change in the insurance sector particularly within the models in the underwriting process, something that is increasingly significant in the light of the rise in insured property losses from extreme weather events. The second area where climate change will have an impact is investment, particularly long–term asset management, since insurers are some of the largest and most diversified investors in the world. In this double materiality aspect, the relevant net–zero insurance frameworks, definitions
and methodologies are still evolving and together with the lack of reliable data creates uncertainties that companies must face.
Finally, Ramón considered critically the challenges of integrating climate change in the three Pillars of Solvency regulation and whether it is advisable to do so. He pointed out the better fit through ORSA scenarios than through its consideration via capital requirements.