Biodiversity Risks in Insurance

Introduction

Biodiversity loss is increasingly recognised as a critical challenge for the insurance sector, with both direct and indirect consequences for insurers’ financial stability, operations, and long-term sustainability. The European Insurance and Occupational Pensions Authority (EIOPA) has taken significant steps to address these concerns, as outlined in its first supervisory report published on 30 June 2025. This short article explores the key themes and implications from the report, focusing on the evolving risk landscape, regulatory requirements, and the practical considerations for insurers in managing biodiversity risks.

 

The Nature and Impact of Biodiversity Risks

The erosion of biodiversity affects insurers in multiple ways. When ecosystems are degraded or collapse - due to factors such as overexploitation, deforestation, or extreme weather events - this can result in capital destruction and stranded assets. For insurers, the ripple effects include increased claims, price volatility in raw materials, disruptions to production and value chains, and the need for relocation or adjustment of economic activities. Such externalities can destabilise entire economies, making risk assessment and management more complex and uncertain.

Physical risks, such as those stemming from natural catastrophes (natcat), have already led to heightened losses in property and business interruption insurance lines. Furthermore, biodiversity loss can indirectly impact insurers through transition risks, as regulatory and societal expectations shift towards greater environmental accountability.

 

Regulatory Developments and EIOPA’s Mandate

Biodiversity risk is now formally recognised as a regulatory risk at the European Union level. Directive EU 2025/2 10, which amends the Solvency II Directive, requires EIOPA to evaluate the extent to which insurance and reinsurance undertakings assess their material exposure to biodiversity loss. Insurers must consider both the impact of biodiversity loss on their business and the impact of their own activities on biodiversity (double materiality). These requirements are embedded within the Own Risk and Solvency Assessment (ORSA) processes, where sustainability risks must be identified, assessed, and, where material, analysed through scenario testing.

As environmental regulations tighten and due diligence obligations grow, insurers face increased costs and greater uncertainty in underwriting. Historic pricing models may not fully capture the emerging risks associated with biodiversity loss, leading to potential mispricing and a surge in claims, particularly in liability lines such as environmental liability and directors’ and officers’ insurance.

 

Challenges in Biodiversity Risk Assessment

One of the main challenges highlighted by EIOPA is the lack of comprehensive, granular data on biodiversity loss and its translation into risk metrics suitable for insurers. While data may exist, it is often complex and not easily adapted to insurance modelling. Quantitative methodologies for assessing biodiversity risks are less advanced than those for climate risks, adding further uncertainty to risk management processes.

Despite these challenges, insurers are encouraged to take meaningful steps using existing data sources and tools. The EIOPA report lists several ongoing initiatives and resources that can help insurers identify exposures, develop scenario analyses, and integrate biodiversity considerations into their risk management frameworks.

 

Practical Implications for Insurers

Investment and underwriting are the two principal activities through which insurers encounter biodiversity risks. Historically, some insurers have viewed biodiversity risk primarily as a reputational issue. However, EIOPA’s guidance makes it clear that a robust materiality assessment is required—one that moves beyond reputational considerations and addresses tangible financial and operational risks.

Insurers are advised to develop tailored scenario analyses that reflect the unique risk drivers within each line of business. For example, agricultural insurance may be particularly exposed to pollinator decline, while property insurance could be vulnerable to increased flooding resulting from wetland loss. Creating realistic scenarios requires collaboration with scientific experts and access to robust, granular data.

 

Integration into Risk Management Processes

To adequately address biodiversity risks, insurers must integrate these considerations into their overall risk management processes:

• Identifying material exposures to biodiversity risks across investment and underwriting portfolios.

• Conducting double materiality assessments to capture both inward and outward impacts.

• Engaging with scientific experts and leveraging available data and tools for scenario development.

• Updating risk models and pricing frameworks to reflect emerging biodiversity risks and regulatory changes.

• Participating in industry initiatives and staying informed about best practices and new methodologies.

 

Conclusion

The EIOPA report marks a significant milestone in recognising and managing biodiversity risks within the insurance sector. As regulatory expectations evolve, insurers must move quickly to build the necessary expertise, data capabilities, and risk management frameworks to address these complex and interconnected risks. Proactive engagement with biodiversity considerations will not only enhance insurers’ resilience but also contribute to broader sustainability goals.