EIOPA head moots climate stress tests for insurers a year early

Insurers could face European climate stress tests as soon as 2023, according to Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority (EIOPA).

Hielkema was speaking at the Reuters Future of Insurance Europe conference.

She said although the tests will take place by 2024 at the latest “it might be we want to do this one quicker.”

Hielkema, who was speaking as part of a panel on climate change, nonetheless stressed there was “no concrete planning” for 2023 tests yet.

She added that stress tests for pension funds next year were also likely to focus on climate change.

Anna Sweeney, the Bank of England’s executive director for insurance, said the central bank was in the process of conducting its first climate stress tests for banks and insurers, with results due in the first quarter of 2022.

“We’ve had to ask for resubmissions from some firms where we have felt that there hasn’t been enough due diligence…or enough clarity,” she told the panel.

Hielkema and Sweeney both said their tests would not be focused on capital requirements. Indeed, Hielkema suggested that the use of a carbon tax was a better way to encourage companies to tackle climate change risk than imposing capital requirements.

Alison Martin, EMEA CEO for Zurich Insurance, also told the panel that a carbon price was needed “as part of a suite of mechanisms to help us get to the transition.”

“We have nearly 70 different versions of carbon price mechanisms…there’s a challenge to get to something which is harmonized,” Martin said.

The suggestion of a moveable feast by EIOPA comes after the Bank of England told banks and insurers last week it is prepared to use its powers to crack down on them if they fail to manage climate risks.

The warning came as the central bank begins to review a potential introduction of capital requirements linked to unsustainable assets.

The Bank said it would take a more active approach to the climate crisis in the new year when City firms would have to demonstrate a good understanding and management of the related financial risks. Those lagging behind would face action by its regulatory arm, it said.

In a climate adaptation report, the Prudential Regulation Authority (PRA) said such action could include ordering a “skilled persons” review of offending firms that could lead to a “deep-dive audit” or additional monitoring.

The regulator said it also had the powers to impose additional capital requirements linked to assets carrying climate risks.

Capital requirements determine the kind of financial cushions banks must have to protect them from risky loans and products on their balance sheets. They can act as a deterrent, since capital rules make risky assets more expensive to hold.

“Where progress is insufficient and assurance or remediation is needed the PRA will request clear plans and, where appropriate, consider exercise of its powers,” the Bank of England said.

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