Sustainability Risk under Solvency II

A practical approach for quantitative assessments under Pillar II requirements

Changing economic landscape and regulatory pressure require the integration of sustainability risk into insurer’s risk management and measurement under Solvency II.

Executive summary

Climate change related risks are material within the exposure of insurers. Regulators are expecting insurers to actively address these risks within their risk management. The integration of such risks into traditional risk management frameworks poses significant challenges.

In this publication, we discuss a practical approach for the quantification of climate change related risks insurers are facing under a Solvency II framework for their investments. In this approach, we are integrating guidelines set out by the regulator, other practitioners as well as current academic research.

Our particular focus for this approach lies on effective implementation into existing processes and calculations for Solvency II. This includes leveraging readily available data sources as well as an effective pathway to scenario design based on existing research.

We demonstrate the viability of this approach by conducting a case study on a sample European life insurer assessing the impacts of different climate policy scenarios on its Solvency II position.

The case study shows, that climate change related risks can have a substantial impact on the Solvency II figures of typical insurers. A proper inclusion of such climate risk related quantifications can lead to valuable guidance and incentives for wider risk and investment management.

The approach laid out here provides an effective way to assess climate change related risks in a robust and transparent manner. We believe that it may serve as an industry best practice approach that meets the changing economic landscape as well as regulatory requirements.

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