The European Insurance and Occupational Pensions Authority (EIOPA) has recommended stricter capital requirements for insurers holding fossil fuel assets.
In a report published today, the Authority’s recommendation urges additional prudential treatment for fossil fuel stocks and bonds to address climate transition risks and ensure financial stability amid Europe’s shift to net zero emissions.
The report follows a mandate given to EIOPA by the European Commission to assess the potential for a dedicated prudential treatment of assets and activities associated with environmental or social objectives or those that harm such objectives.
EIOPA’s latest analysis suggests that insurers holding significant fossil fuel investments are increasingly vulnerable to market volatility and asset devaluation as countries adopt greener policies.
To counteract this, EIOPA is proposing a 17% capital surcharge on fossil fuel equity holdings and up to 40% for related corporate bonds. This approach targets investments in companies primarily involved in coal, oil, and natural gas exploration, production, or distribution.
EIOPA highlighted that as governments accelerate transition plans, carbon-intensive industries face rising regulatory, reputational, and operational risks. A sudden policy change, a rapid drop in demand, or advancements in green technologies could lead to significant valuation adjustments for carbon-heavy assets.
If insurers do not account for these risks prudently, they risk balance sheet vulnerabilities that could impact policyholders and overall financial stability.
The European regulator’s proposal is aligned with the goals of the European Green Deal, aimed at achieving a carbon-neutral economy by 2050. According to EIOPA, enhanced capital requirements will better reflect the anticipated exposure to loss, incentivising insurers to reduce fossil fuel investments or increase capital reserves to buffer against potential devaluations.
This recommendation awaits further review and potential integration into the EU’s Solvency II framework, which already mandates that insurers maintain sufficient capital to cover a range of risks. If adopted, these changes could mark a significant shift for insurers across Europe, pushing them to reassess asset allocations and seek lower-risk, sustainable alternatives.
While many insurers have already reduced fossil fuel exposure, EIOPA’s push could further accelerate divestment trends within the sector. For institutional investors, this potential regulatory change underscores the importance of managing climate risks proactively, as regulatory pressures intensify globally.
Julia Symon, head of research and advocacy at Finance Watch, said: “EIOPA’s report marks a major milestone in a multiannual effort to address the financial implications of climate change. Policy recommendations in the report are based on empirical evidence and provide a basis and an obligation for regulators to act and deliver on their financial stability mandate. Addressing these risks is essential for the future of the insurance sector itself, as climate change is already undermining insurers’ business models today.”
The European Commission will review EIOPA’s recommendations as part of its ongoing evaluation of capital adequacy frameworks. EIOPA’s recommendations could serve as a model for other regulatory bodies as the financial industry grapples with the impacts of climate change.
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