The increasing frequency and severity of natural disasters due to climate change pose significant challenges for insurance companies. Insurers face additional risks from investing in climate-polluting industries because they could deteriorate in value as a result of changing market conditions or policy actions. In November 2022, EIOPA (The European Insurance and Occupational Pensions Authority) published a discussion paper exploring climate-related transition risk on assets.
The paper discussed various approaches to classify assets into climate-friendly and harmful categories and to assess their market risk. Due to the complex nature of the exercise, no changes to capital requirements were proposed at that stage, and feedback from stakeholders will further shape the proposed methodologies. The article highlights the challenges in constructing portfolios and assessing capital charges for climate transition risk, as well as the necessity for improved data requirements and forward-looking models to address recent changes in climate awareness and policies.