Fossil fuel investment could cost extra under EU insurance plans

Insurers could be penalised for investment in fossil fuel companies under plans being discussed by EU regulators on Tuesday and Wednesday in Frankfurt (24-25 September). 

The move could represent a turning point in recognising the risk posed by climate change within the financial sector – in an industry that often has to bear the cost of damage from flooding and forest fires. 

New EU insurance laws – politically agreed last December and now waiting to be formalised into the statute books – said insurers should have to consider the harm their assets pose to society or the environment, highlighting investment in sectors like oil, gas and coal.

The bloc’s overarching insurance law, Solvency 2, is “all about assessing and managing risks”, Marika Carlucci, EU Policy Officer at ShareAction, told Euronews – and the forthcoming transition away from fossil fuels means there’s a massive risk on the horizon. 

Assets linked to carbon-intensive sectors “are at risk of rapidly losing value” as regulation creates a net-zero economy, Carlucci said, adding: “If the value collapses suddenly, this can lead to financial instability.”

The meeting comes in the week after heavy rains caused widespread flooding and forced mass evacuations in central Europe, which some have linked to a changing climate.

Increasingly freak weather events have led to fears of an “insurance protection gap”, in which parts of the world become uninsurable, and hence potentially uninhabitable.

40% hike

In December, the European Insurance and Occupational Pensions Authority, Eiopa, proposed to raise capital charges by up to 40% for insurance companies’ exposure to fossil fuel bonds.  

For shares, meanwhile, they’d face a hike of up to 17% in prudential requirements – effectively making it less profitable for insurers to buy stakes in the likes of Shell or ExxonMobil.

“Climate change introduces transition risks related to the decarbonization of the real economy,” Eiopa’s consultation paper said, citing the risk of “stranded assets” — investments that don’t adapt to a fossil-free world.

The national supervisors who oversee Eiopa aren’t so sure – and, back in June, expressed concerns that the plan might discourage investment.

Now they’re back for a second go – and proponents of the change are optimistic they’ll agree this time. 

“We hope that they [supervisors] are going to endorse Eiopa’s report,” in particular for fossil fuel assets, Julia Symon, head of research and advocacy at Brussels-based non-profit Finance Watch, told Euronews.  

Backward-looking

Symon brushes off concerns that there’d be a double counting of risk – instead saying that existing methods can’t deal with unprecedented one-off event like the future fossil fuel phaseout.

“Insurers’ models are not adapted to deal with what is coming; they base their analysis on extrapolating the past,” Symon said, arguing that a clear EU position would lead to a robust and consistent treatment.

Whatever Eiopa agrees, it will then be for the European Commission to judge how to take it forward in legislation.

Maria Luís Albuquerque, the Portuguese Commissioner due to take on the financial services brief, has been charged by President Ursula von der Leyen with ensuring the EU remains a “global leader in sustainable finance” — but was also told to cut back on unnecessary or incompatible rules that impede competitiveness, following a slew of green-finance measures that have poured out of Brussels.  

Both Symon and Carlucci are keen to point out that the impact on insurers’ bottom lines would likely be minimal.  

Eiopa’s sums suggest it will tweak solvency ratios by a matter of a few percent, when in reality most insurers exceed their regulatory minimum holdings by a factor of two or three, Symon noted.

Nonetheless, “it’s a sign that there is a risk …. the first recognition that it is risky” for insurers to invest in companies whose business model might be on the way out, Symon said.

“We don’t actually see this as compromising competitiveness,” Carlucci said, adding: “It will make insurers more competitive, and make sure that their business is resilient in the future.”