Fitch Ratings, the credit rating agency, says that solvency capital ratios for insurers in the European Union with meaningful property exposures could edge higher if the European Insurance and Occupational Pensions Authority advances proposals to reflect natural catastrophe adaptation measures more directly within the standard formula framework.
The agency regards the prospective adjustments as credit positive, while emphasising that any improvement in capital metrics is unlikely to be material from a ratings standpoint.
According to Fitch Ratings, explicitly incorporating adaptation measures into the Solvency II regime would allow reported solvency positions to better capture efforts undertaken by insurers to reduce vulnerability to natural catastrophe events.
The agency states that this would enhance risk sensitivity within the prudential framework and encourage risk-reducing investment. However, Fitch Ratings does not anticipate that the potential uplift in Solvency II ratios would, in itself, lead to significant rating changes.
Fitch notes that the consultation opened by the European Insurance and Occupational Pensions Authority in January 2026 outlines a range of options aimed at aligning capital requirements more closely with adaptation initiatives, such as flood defence infrastructure.
As highlighted by Fitch, the proposals include reflecting adaptation measures in periodic reviews and recalibrating standard formula parameters, allowing undertaking-specific parameters for certain sub-modules and risk factors, recognising adaptation as a form of risk mitigation under Solvency II, introducing additional parameters into the standard formula, and clarifying the treatment of such measures within internal or partial internal models.
In the agency’s view, translating adaptation measures into capital relief presents practical complexities. The agency underscores that reliable and consistent data will be critical to implementation, potentially posing challenges for smaller insurers that apply the standard formula rather than internal models.
Fitch further observes that adaptation measures may increase insured values, as rebuilding to higher resilience standards can raise replacement costs. This, Fitch explains, could elevate natural catastrophe capital charges within the standard formula. Although reduced expected losses may lower premiums per unit of risk in the non-life premium risk module, Fitch Ratings believes this effect may only partly offset higher catastrophe charges.
Fitch Ratings points out that the consultation period runs until 17 April 2026 and expects that any agreed reforms at European Union level would not be introduced before 2027.
Even if implemented, the agency considers it unlikely that a marginal reduction in the cost of capital for certain property covers would materially stimulate demand. Fitch notes that recently adopted changes to the calculation of natural catastrophe capital requirements under the Solvency II Delegated Regulation, due to take effect at the start of 2027, may offset part of any improvement in solvency ratios.
Moreover, Fitch comments that some policyholders may continue to regard natural catastrophe insurance as costly or unnecessary, particularly where there is an assumption of state support following major losses.
The agency expects the role of compulsory natural catastrophe schemes and state-supported reinsurance arrangements to expand across Europe, the Middle East and Africa as climate-related exposures increase and private reinsurance capacity is tested.
Nevertheless, Fitch maintains that a protection gap is likely to persist, with extreme or correlated events capable of placing strain on even well-established mechanisms.
Fitch Ratings also reiterates that physical climate risk represents a growing consideration in its assessment of insurers’ credit profiles, driven by climate change and rising asset values. Through its Climate Vulnerability Signal (Climate.VS) criteria, Fitch Ratings evaluates the extent to which an issuer’s creditworthiness may be exposed to long-term transition and physical climate risks.
While the Climate.VS is calculated on an unmitigated basis, Fitch Ratings incorporates recognised risk-mitigation measures into its analysis of key rating drivers and their ultimate influence on ratings.
