European insurers face climate-stance stress tests within 2-3 years, top regulator warns

European insurers should face their first climate-related stress tests within a two-to-three-year time horizon, Petra Hielkema, the chief of the European regulatory office  EIOPA, told an online conference Tuesday, December 7.

“I truly hope that within two to three years: climate stress tests for insurers and pension funds,” said Hielkema when asked for her office’s goals on climate policy for the coming period.

First round tests will not lead to any added climate-based prudential requirements, she vowed, although such requirements appear likely down the road.

“It’s way too early for stress tests that really address that,” Hielkema said.

Instead, the first round of eventual climate stress tests will be more informative to “assess how vulnerable our industry is to climate related risks.”

To make that happen, EIOPA’s to-do list also includes prodding the industry to finalise ESG rating models that will allow for greater climate sensitivity in both investing and underwriting decisions, Hielkema noted.

“We need to answer that question evidence-based …. and I would like to achieve that in the next two to three years,” Hielkema noted. Failure to deliver evidence-based criteria risks eventual backlash and opens the door to greenwashing and backsliding, she indicated.

When European regulators do eventually proceed towards putting climate-policy into prudential requirements, insurance regulators will likely follow leads being laid down for banks by the European Central Bank (ECB), Didier Millerot, the head of the European Commission’s Insurance and Pensions unit, told an ensuing panel discussion.

The protection element of the insurance industry will require “some specificity” in regulatory approach and a “targeted rule” for supervision, he said.

“But on the prudential requirements and possible need for further incentives, I think it is right that we address banks and insurers in a consistent and parallel way,” Millerot said. “The technique may be different, but the challenges are the same, so there should be a lot of consistency.”

The ECB is on track to present a study on potential climate-driven changes to its core capital requirement in 2023, Irene Heemskerk, who heads the ECB’s Climate Change Centre, noted of the banking regulatory timeline.

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