N° 171 : Survey on the integration of sustainability risks into the governance system under Solvency II

While Delegated Regulation (EU) 2015/35 defines and provides for the integration of sustainability risks on both the asset and the liability side, around 20% of the undertakings (irrespective of their size) restrict the definition of sustainability risks to the asset side only. Furthermore, confusion between sustainability risks and sustainability factors (or environmental, social or governance -ESG- criteria) sometimes leads to a lack of monitoring of the indicators that allow for the required risk analysis.

Half of the undertakings included sustainability risks in the three written policies explicitly provided for in the regulations. Their integration of these risks sometimes lacks precision. The investment risk management policy appears to be the most exhaustive policy, even though, for some undertakings, this integration process is carried out by including ESG criteria in investment criteria rather than by analysing sustainability risks. Concerning the underwriting and provisioning policy, the ACPR notes that the integration of sustainability risks, and especially that of climate change-related risks, has seldom led to changes in provisioning assumptions or methodologies. The ACPR therefore urges undertakings to exercise caution and to fully integrate the 2022 and 2023 weather events into their historical provisioning data.

Lastly, the ACPR finds that there is a discrepancy between the internal materiality assessment of sustainability risks and that reported in the ORSA (Own Risk and Solvency Assessment) reports. Furthermore, while most undertakings considered these risks to be material in light of their activity, only a minority of them included sustainability risks other than climate change in their ORSA report. As regards the analysis of climate change-related risks in the own risk and solvency assessment process, the European authority recommends, for the assessment of the materiality of climate change impacts, the use of specific scenarios and a longer time horizon than the one used for the analysis of other risks (which are assessed according to the same time horizon as strategic plans). The vast majority of undertakings (75%) does not apply this recommendation properly. In addition, this survey shows that compliance with EIOPA's position on the matter improves the quality of assessments.

In closing, despite the stated willingness of a majority of insurance and reinsurance undertakings to adapt their strategy and risk management with a view to integrating sustainability risks, the quality of work undertaken in that regard remains uneven across the market, and further work is needed in order to fully integrate all these risks into governance and risk management systems. To that end, insurance and reinsurance undertakings must face at least three issues, two of which are exogenous and one internal:

• the quality of available data, especially for sustainability risks other than climate change,

• their reliance on external data providers over which control and understanding may still be limited,

• a lack of consistency between their various internal sustainability risk assessment and monitoring activities, as well as between the latter and the information included in non-financial reports (for instance, in their 29LEC reports).

In light of the diverse, complex and evolving nature of sustainability risks, the efficient assessment and full integration of these risks in the governance and risk management systems of insurance and reinsurance undertakings can only be achieved if awareness-raising and training efforts are undertaken that involve all stakeholders in charge of risk management. These efforts include in particular (i) the integration of sustainability risks in the duties of key risk management and actuarial functions and (ii) ongoing reporting to governance bodies on these sustainability risks.