Forward-looking assessments of climate risk could be factored into capital requirements for insurers, the chair of European regulator has said – but only after modelling improves.
Gabriel Bernardino, chair of the European Insurance and Occupational Pensions Authority (Eiopa), said his organisation had explored the possibility of adopting a forward-looking capital charge under pillar one requirements of Solvency II.
"But the difficulty is, if we look for example at physical risk, while insurers have good history of modelling physical risks and natural catastrophes, that is [still] evolving," he told the Insurance and Climate Risk conference.
"We are not yet there in terms of integrating the kind of scientific evidence that is emerging and including this modelling," he explained. "I believe that, in the near future, that will be a possibility. When we have modelling that is integrating climate change in these natural catastrophe models, for example, it would make sense to include them in what you are looking at in a pillar one sense."
Solvency II is the EU's risk-based capital regime for insurers. It consists of three pillars: pillar one covers how much capital insurers must hold, pillar two sets out requirements for governance and risk management, and pillar three sets out disclosure requirements.
Eiopa gave an opinion to the European Commission in October about how sustainability should be covered in Solvency II. However, most of its recommendations cover pillars two and three.
Another panel at the conference heard that the sector still has improvements to make when it comes to modelling climate risk, particularly when it comes to scenario analysis, as recommended by the Task Force on Climate-related Financial Disclosures. For example, some of the main climate modellers still do not include perils such as hurricane or precipitation, a panel heard.
Bernardino added that more evidence is needed before climate change is integrated in pillar one.
"Capital regimes need to be evidence-based, we need to have some evidence in terms of behavioural risks. The reality is we have created extensive collections of all the possible information in the insurance industry and beyond.
"The fact is that currently we still don't have hard evidence that this type of green product has different risk profiles. We don't have hard evidence right now, so you need to push this through pillar two and three."
The European Commission will use Eiopa's opinion in deciding its reforms to Solvency II, due to be revealed before the end of 2020.