insurers consulted on future of sustainability risks.

The European Insurance and Occupational Pensions Authority (EIOPA) recently launched a consultation on the issue of integrating sustainability risk by insurers.

The consultation is set to run until the end of January 2019 and is likely to spark debate on the risk management considerations for insurers and the impact on capital charges under the Solvency II directive. Stakeholders have been invited to assess a variety of factors, including the potential benefits of any changes, and the expected cost of compliance.

This latest initiative is part of a wider commitment to sustainability on the part of the European Commission (EC). The EC aims to bring about a unified classification system of sustainable economic activities, stronger disclosure requirements, and the means to help investors compare the carbon footprint of their investments.

At Lombard Odier Investment Management (LOIM), we believe sustainability-led opportunities present significant investment opportunities. We therefore strongly support this initiative and trust that the final results will positively embrace the points raised in the consultation paper. Indeed, many of the issues highlighted by EIOPA in their draft consultation marry with points we raised recently in our insurance investment viewpoint “The next input for insurance asset liability management” that we published in September this year.

EIOPA recognise that sustainability risks have implications for both sides of the balance sheet and have explicitly stated that introducing asset side sustainability measures must come with liability side sustainability awareness. This is in line with our views on the topic. In particular, insurers who do not integrate this fully could find themselves at a disadvantage to their peers.

EIOPA have also proposed making explicit reference to sustainability risk management in insurance and reinsurance companies’ risk management processes and policies. Risks linked to sustainability have been recognised beyond the traditional risk and return aspects - reference to other risks like liquidity, quality, pricing and reputation clearly also matter.  

Direct links to “sustainability events” such as climate change have also been raised. There is a growing body of research on such topics that can help insurers on the liability side. Asset strategies that provide a direct impact are also increasingly available for investment. What is equally positive is that EIOPA has also made reference to secondary and tertiary events that may have an indirect but nonetheless significant impact on insurers. For example, bad governance can cause an increase in liability insurance claims and have a negative impact on assets, thereby impacting both sides of the balance sheets. The regulators’ views are in line with our own in terms of how sustainability is a much wider topic and can impact the entire balance sheet.

We also support EIOPA’s aim of ensuring that beneficiaries, and those purchasing products from insurance companies, have their views considered for when products are being designed and marketed. This is especially relevant to sustainability as social trends and beneficiary views are given greater visibility. This is a trend that is not confined only to insurers but is now part of a global social shift that has a direct impact on investments and regulations.

What is clear from this consultation is that the importance of recognising, executing and monitoring sustainable led considerations in liabilities and sustainable driven asset strategies should be the next input for insurance asset liability management.