Fitch Ratings has stated that the recently proposed capital surcharges by the European Insurance and Occupational Pensions Authority (EIOPA) on fossil fuel-related assets will not impact the ratings of European insurers.
These surcharges are unlikely to significantly impact insurers’ financial stability ratios, as most have limited exposure to fossil fuel-related equities and bonds. They will also not influence capital scores in Fitch’s Prism Global model.
EIOPA has proposed these surcharges to address the transition risks associated with fossil fuel-related assets. For equities, it suggests adding up to 17 percentage points to the 39% risk charge applied to Type 1 equities (those listed in regulated EEA or OECD markets) in the S2 standard formula. For corporate bonds, a supplementary charge of up to 40% for spread risk is recommended.
EIOPA’s impact assessment shows that these surcharges will have a limited effect on Solvency II (S2) ratios. The equity surcharge would generally reduce average S2 ratios by less than 100 basis points, with the most notable impact seen in Norway (173bp), likely due to greater exposure to oil companies in insurers’ portfolios. Even this, however, is not significant in solvency terms. The surcharge on corporate bonds would also typically reduce S2 ratios by less than 100bp, with Italy experiencing the largest impact (134bp).
Although climate-related risks are not explicitly included in the Prism model, exposure to natural catastrophe risk, which is influenced by physical climate change, is included.
Additionally, climate-related risks may affect Fitch’s scoring of rating drivers outside the model if they are material and foreseeable. For example, significant exposure to natural catastrophe risk could affect ratings for financial performance and earnings due to claims volatility, as well as company profile due to business risk. Similarly, over-exposure to real estate investments vulnerable to transition risks could influence assessments of an insurer’s investment and asset risk.
EIOPA’s recommendations are now under review by the European Commission. If implemented, Fitch anticipates that insurers will accelerate the divestment of their already minimal holdings in fossil fuel-related assets.
