**4. The European way for the insurance sector in sustainable development**

In 2018, the European Insurance and Occupational Pensions Authority (EIOPA), received a request from the European Commission for an opinion on sustainability within Solvency II, with a particular focus on aspects relating to climate change mitigation [30]. According to EIOPA's understanding, the term "climate risks" aims to include all risks stemming from trends or events caused by climate change, i.e., *climate change-related risks*. This encompasses extreme weather events, including natural catastrophes, but also more general climate trends such as a general rise in temperature, sea level rise, or climate-related forced migration that could affect (re) insurance activity. Concerning the impact of climate change-related risks on nonlife, health and life insurance, EIOPA tried to collect information from non-life (re)

insurance business. This initial step was motivated by the consideration that non-life lines of business may be affected by climate change effects over a shorter time period than the life and health business. In addition, EIOPA started to collect additional evidence on the impact of climate change related risks on the morbidity and mortality risks through a public consultation. An integration of sustainability risks in Pillar 1 of Solvency II has to take account of capital requirements within the overall Solvency II framework which aims to ensure that undertakings can survive severe unexpected shocks (losses) and still meet their obligations to policyholders over a one-year period [31] (Article 101(3) of the Solvency II Directive [32]). The Solvency II Directive expresses this as the ability to withstand shocks with a 1 in 200 probability within this one-year time horizon.

Capital requirements in Solvency II are calibrated based on a one-year time horizon, while sustainability risks are generally considered to be long-term risks. In particular, climate change-related risks are expected to emerge over a longer time horizon which presents practical challenges for integrating them in the current Pillar 1 capital requirements.

Further, specifically for traditional non-life business, the insurance cover period (during which undertakings are liable for claims that occur) just spans the next 12 months, at the end of which, undertakings can theoretically adjust the pricing for the future, based on claims experience. This repricing is, in particular, enabled by the fact that the uncertainty on the final amount of natural catastrophe claims is limited, as they are usually settled within one year after their occurrence.

Unfortunately, market participants tend to believe that they have time to adapt their investment strategy within the next 10 to 20 years, and thus firms have limited incentives to consider climate change risks, in particular, transitions risks, in their asset portfolio today. This behavior refers to the so-called "tragedy of the horizon" coined by Mark Carney [8].

Accompanying the aforementioned aspects, the European Commission has initiated a Taxonomy Regulation (TR), agreed at the political level in December 2019, which was intended to create a legal basis for the EU Taxonomy, published as a directive in 2020 [33]. As explained in the final Report of the Technical Expert Group on Sustainable Finance (TEG) [34] the TR sets out the framework and environmental objectives for the Taxonomy, as well as new legal obligations for financial market participants, large companies, the EU and Member States. The EU Taxonomy is a tool to help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy. The TR will be supplemented by delegated acts which contain detailed technical screening criteria for determining when an economic activity can be considered sustainable, and hence can be considered Taxonomy-aligned.

Consistent with the EU Action Plan on Financing Sustainable Growth, finance is a critical enabler of transformative improvements in existing industries in Europe and globally. The OECD estimates that, globally, EUR 6.35 trillion a year will be required to meet Paris Agreement goals by 2030. Public sector resources will not be adequate to meet this challenge, and mobilization of institutional and private capital will be necessary [34].

A part of these reflections has, meanwhile, also found entry in the forementioned Taxonomy Directive, in particular, in Articles 9 and 10 [33]. As environmental objectives, the following topics are considered:

a.climate change mitigation;

b.climate change adaptation;

*Insurance Business and Sustainable Development DOI: http://dx.doi.org/10.5772/intechopen.96389*

c.the sustainable use and protection of water and marine resources;

d.the transition to a circular economy;

e.pollution prevention and control;

f. the protection and restoration of biodiversity and ecosystems.

European insurance companies will be strongly affected by these political measures in the future, especially concerning their asset management. It will, however, be difficult to judge which investments are truly Taxonomy-aligned. E.g., in Solvency II, government and related bonds are considered to be the safest investment in Pillar I, but governments typically also engage in the armaments industry or fossil energy, like brown and stone coal mining in Germany, contradicting, in part, the above topics.

Recently, further ESG aspects other than mere climate change risks, have come into the focus of European insurance supervisors. For instance, the German supervisory authority BaFin compiles the following ESG topics as specific examples to be considered in the future by European insurance companies [26, p. 13]:


These aspects were already partly addressed in the EU directive on non-financial disclosure in 2014, acknowledging the importance of publishing businesses information on sustainability such as social and environmental factors, with a view to identifying sustainability risks and increasing investor and consumer trust. Actually, disclosure of non-financial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. Thus, disclosure of non-financial information helps the measuring, monitoring and managing of undertakings' performance and their impact on society in order to take account of the multidimensional nature of corporate social responsibility (CSR) and the diversity of the CSR policies implemented by businesses matched by a sufficient level of comparability to meet the needs of investors and other stakeholders, as well as the need to provide consumers with easy access to information on the impact of businesses on society [35].
