Add a bookmark to get started


The Solvency II Directive is applicable to all EU authorised (re)insurance undertakings and sets out:

  • capital requirements
  • governance requirements
  • risk management
  • reporting and public disclosures. 

The Directive aims to foster the protection of policyholders and reduce the likelihood of an insurer failing. The Solvency II risk-based approach enables an undertaking to assess the “overall solvency” of a (re)insurance undertaking through both quantitative and qualitative measures. In 2021, the Solvency II framework has been adopted to include the prudential treatment of sustainability risks.

Climate change risks must be considered and assessed by (re)insurance undertakings, different scenarios considered and incorporated into risk modelling and assessments of solvency. It can be expected that as climate change related damage-causing and loss events ramp up, so will the cost of insurance and increase in contractual insurance restrictions or limitations. At the same time, these factors may have the effect of constraining the insurance sector.

Framework legislation

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)

Solvency II requires integration and prudential treatment of sustainability risks in governance and risk management. Tackling these new rules has a series of practical impacts, requiring insurance and reinsurance undertakings to inter alia review and adapt their overall system of governance, which includes:

  • the composition, roles and responsibilities of the board of directors, both collectively and individually;
  • the roles and responsibilities of the internal control functions;
  • the roles and responsibilities of the actuarial function;
  • train their key function holders and relevant employees in the new concepts and their implications; 
  • adapt their internal policies, procedures and processes.

The system of governance should be proportionate to the nature, scale and complexity of the operations of the undertaking. 

Implementing measures

The adopted amending regulations CDR (EU) 2021/1256 (CDR) require the integration of sustainability risks in the risk management and governance of (re)insurance undertakings. Insurers are required to have sustainability in their investment and underwriting strategies monitored by their risk management as well as their actuarial function. 

As part of the prudent person principle, insurers will also need to take into account the potential long-term impact of their investment strategy and decisions on sustainability factors.

The CDR requires (re)insurance undertaking to assess and manage the risk of loss or of adverse change in the values of insurance and reinsurance liabilities, resulting from inadequate pricing and provisioning assumptions due to internal or external factors, including sustainability risks.

The CDR requires an insurance or reinsurance undertaking to ensure that 

  • proper actions are taken so that sustainability risks relating to the investment portfolio are properly identified, assessed, and managed. 
  • to integrate sustainability risks in their underwriting and reserving policy, asset-liability management policy and investment risk management policy.
  • to include the sustainability risks consideration in the opinion to be expressed by the Actuarial Function in respect of the underwriting policy.

Emerging risks and the sustainability risks which are identified by the Risk Management Function, shall form part of the risks which the insurance or reinsurance undertaking is or could be exposed to, taking into account potential future changes in its risk profile due to the insurance or reinsurance undertaking's business strategy or the economic and financial environment, including operational risks.

Remuneration policies of insurance and reinsurance undertakings will now also require to take into account the integration of sustainability risks in their risk management systems and to amend their remuneration policies to include information as to how the said policy takes into account the integration of sustainability risks in the risk management system.

The CDR entered into force on 2 August 2022. Insurance and reinsurance undertakings are expected to ensure that their policies have been updated and approved by the Board of Directors in line with the CDR.

Supervisory convergence

EIOPA Opinion on the Supervision of the Use of Climate Change Risk Scenarios

In April 2021, the European Insurance and Occupational Pensions Authority (EIOPA), issued an Opinion on the Supervision of Use of Climate Change Risk Scenarios in ORSA (Own Risk and Solvency Assessment) (the EIOPA Opinion) to the competent authorities of EU member states.

The main theme in the EIOPA Opinion is that (re)insurance undertakings be forward looking and this is demonstrated in a few ways:

  • in time - the short-term (5 - 10 years from now), medium-term (30 years from now) and long term (75 - 80 years from now)
    An initial survey found that of the few (re)insurance undertakings which have provided for climate change risk in their ORSA, only short-term climate change risk was reported.
  • planning for a global temperature scenarios: 1.5°C or less, 2°C or less, more than 2°C
  • having a broad view of climate change risk and how this equates to classic prudential risk categories, for example: underwriting risk, market risk, credit and counterparty risk, operational risk, reputational risk and strategic risk.

According to the EIOPA Opinion, the broad categories of climate change risk are: 

Transition Risks

Transition risks are risks that arise from the transition to a low-carbon and climate resilient economy, including:

  • Policy risks, for example because of energy efficiency requirements, carbon pricing mechanisms which increase the price of fossil fuels, or policies to encourage sustainable land use.
  • Legal risks, for example the risk of litigation for failing to avoid or minimise adverse impacts on the climate or failing to adapt to climate change. 
  • Technology risks, for example if a technology with a less damaging impact on the climate replaces a technology that is more damaging to the climate. 
  • Market sentiment risks, for example if the choices of consumers and business customers shift towards products and services that are less damaging to the climate.
  • Reputational risks, for example the difficulty of attracting and retaining customers, employees, business partners and investors if a company has a reputation for damaging the climate. 
Physical risks

Physical risks are risks that arise from the physical effects of climate change, including:

  • Acute physical risks, which arise from particular events, especially weather-related events such as storms, floods, fires or heatwaves that may damage production facilities and disrupt value chains. 
  • Chronic physical risks, which arise from longer-term changes in the climate, such as temperature changes, rising sea levels, reduced water availability, biodiversity loss and changes in land and soil productivity.

Actions needed by (Re)Insurance Undertakings  

  • IDENTIFY material climate change risks using qualitative and quantitative measures
  • SUBJECT identified risks to sufficiently wide range of stress tests or scenario analyses
  • ASSESS the materiality of the climate change risk in the context of Solvency II
  • ADDRESS the climate change risk with actions in anticipation / mitigation
  • REPORT appropriately on the short, medium and long-term climate change risks and their respective impact on solvency assessments
  • MOTIVATE reasons why the(re)insurance undertaking believes climate change risk is not material

It is expected that the scope and methodologies of quantitative or scenario analyses of climate change risk conducted by (re)insurance undertakings will undergo its own evolution. Approaches to risk modelling will develop with more data and experience. Consistent with the EU approach in other respects, quantification of climate change risk will be proportional to the size, nature and complexity of (re)insurance undertakings’ exposures.

Competent authorities have had two years to implement the objectives of the EIOPA Opinion on a national level. EIOPA will now commence monitoring and supervision of the objectives of the Opinion. As the regulatory environment responds to the global environment, we can expect EIOPA to issue of further Opinions.

Read the Supervisory Guidance here 

In addition, EIOPA has issued a discussion paper which outlines approaches to assess the prudential treatment of insurers’ sustainable assets and activities.

The discussion paper outlines the intended scope, methodologies and data sources for this assessment exercise and focuses on three distinct areas of analysis:

Assets and transition risk exposures: This first area concerns insurers’ investments and proposes ways to assess how risks stemming from the transition to a less carbon-intensive economy could potentially impact prudential risks related to stocks, bonds and real estate.

Underwriting risk and climate change adaptation: The second area of analysis focuses on non-life insurance and examines the potential effect of climate-related adaptation measures on underwriting risk and related loss exposures from a prudential perspective.

Social risks and objectives: The third area discusses how social risks or harm to social objectives could translate into prudential risks and assesses their corresponding prudential treatment in the requirements on governance, risk management as well as reporting and disclosure.

As to social risks:

EIOPA's paper explicitly maps social risks to existing Solvency II risk types:

  • Underwriting risk — through workers' compensation, increased mortality or morbidity, increased losses under directors and officers (D&O) liability claims etc.
  • Market risk — through asset price volatility, stranded assets due to investee reputational risk, equity or bonds in economic activity that damages health or housing etc.
  • Operational risk — through inadequate or failing internal processes that do not allow insurers to act on previous signals of social risk.

It suggests that social objectives and risks should be conceptually similar to the treatment of climate-related risks — a recognition that 'ESG' goes beyond climate change, and perhaps a nod to the European political landscape where social objectives are increasingly being discussed.

However, EIOPA recognises the challenges around social objectives and risks, including the level of public debate about what these should be and how they can be measured and disclosed. It seeks feedback on this, and also on how corporate governance measures, such as remuneration and board composition, can help reduce the potential level of social risks.

EIOPA urges insurers to use their Own Risk and Solvency Assessments (ORSAs) as a starting point to investigate potential exposure to social risks. It also notes the need for both qualitative and quantitative analysis. If they are not already doing so, insurers should consider how social risks could affect their solvency ratios. 

National implementation

European texts: Solvency II / CDR (EU) 2021/1256

In Belgium, the Solvency II Directive is implemented in several legal texts. The main ones are:

  • Act of 13 March 2016 on the status and supervision of insurance and reinsurance undertakings (Solvency Ii Act)
  • Various Royal Decrees implementing the Solvency II Act.

Furthermore, the national competent authority that is responsible for prudential supervision on insurance and reinsurance undertakings, the National Bank of Belgium (NBB), issues regulatory guidance interpreting Belgian rules implementing Solvency II. The NBB considers climate-related risks as a priority area both for micro- and macroprudential purposes. Its macroprudential findings are published in annual Financial Stability Reports.

NBB Circular 2016_31 on the System of Governance (Overarching Governance Circular) and NBB Circular 2022_09 on the Assessment of the Own Risk and Solvency (ORSA Circular) provide detailed guidance on the NBB’s expectations regarding risk management. 

Regarding sustainability risks, the NBB has the following expectations:

  • (Re)insurance undertakings are expected to assess the short- and long-term impact of climate-related risks in their ORSA, for both physical risks and transition risks.
  • The risk management function should identify and assess sustainability risks.
  • The opinion of the actuarial function in accordance with Article 48(1)(g) Solvency II Directive should consider sustainability risks when assessing the underwriting policy.
  • (Re)insurance undertakings should consider sustainability when assessing and supervising the security, quality, liquidity and returns of the investment portfolio and when implementing the prudent person principle.
  • The individual performance of identified staff receiving significant variable remuneration should be based on financial and non-financial criteria to be detailed in the company’s remuneration policy. The non-financial criteria should consider compliance with sustainability objectives and ethical aspects.
  • (Re)insurance undertakings should take appropriate measures to improve or refresh the knowledge of the members of the management bodies through training programmes. These training programmes should cover all risks to which the company is exposed, including sustainability risks.
  • In its Circular of 1 December 2020, the NBB describes specific expectations and reporting requirements regarding the energy efficiency of real estate exposures.

Contacts: Pierre Berger / Alexander Hamels 

European texts: Solvency II, CDR (EU) 2021/1256

In France, the implementation of the Solvency II Directive involved the following legislative measures: Order no. 2015-378 (2 April 2015) and Decree no. 2015-513 - These legal instruments, together with a Ministerial Order dated 7 May 2015, contain the necessary regulatory provisions to incorporate the Solvency II Directive into French legislation.

From a risk management perspective, under French law, both the French Prudential Supervision and Resolution Authority (ACPR) and the French Financial Market Authority (AMF) have jointly addressed the monitoring and evaluation of climate commitments by financial actors (1.). Moreover, there are specific reporting requirements at the local French level (2.). Lastly, we want to draw your attention to the recent greenwashing misdemeanors to be closely monitored (3.).


1. The Joint Report of ACPR and AMF on climate governance

Regarding Environmental, Social, and Governance (ESG) requirements, the ACPR and AMF, in their joint report of October 2022, identified areas for improvement related to insurance undertakings' governance of climate commitments. They specifically focused on two aspects:

1.1. Enhancement of the Own Risk and Solvency Assessment (ORSA)
The ORSA is a risk management tool used for internal assessment by insurance or reinsurance companies to understand their risk profile and solvency, with a goal to address potential developments affecting solvency. ACPR and AMF recommend the systematic integration of tracking indicators into risk mapping presented to the board of directors. This integration ensures the fulfilment of commitments and the proper inclusion of environmental risks in the risk management policy.

1.2. Remuneration Policy for Executives and Staff of Insurance Organizations
Insurance organizations should align their remuneration policy with sustainability risks. This alignment can be achieved through objectives related to the measurement and management of climate risk. ACPR and AMF recommend greater transparency regarding the weighting of environmental objectives and the criteria used to assess their satisfaction within remuneration policies.


2. French Local Specific Reporting Requirements

In France, Article 173-VI of the law dated 17 August 2015, which pertains to the energy transition for green growth, mandates the disclosure of methods for considering ESG criteria in investment policies and risk management procedures. It encourages the consideration of climate-related risks. Effective from 30 December 2015, a decree issued in accordance with article L. 533-22-1 of the French Monetary and Financial Code, stemming from article 173-VI, outlines the information that must be published regarding these criteria and specifies the information that may be provided concerning climate aspects.

Article 29 of the Energy Climate Law, enacted on 8 November 2019, aligns with this framework and combines French and European requirements. It compels financial actors to disclose the impacts of their portfolios on climate change and biodiversity erosion, as well as the vulnerability of their portfolios to these two themes. Furthermore, financial actors are required to publish the policies they have implemented to address these risks within their investment strategy.

The decree implementing Article 29 was published on 27 May 2021, with the initial reporting obligation for the fiscal year 2021 to be fulfilled in 2022. These reporting obligations apply to all financial actors whose assets under management and/or on their balance sheet exceed 500 million euros.


3. Greenwashing misdemeanor

3.1. Concept of Misleading Commercial Practices
Under French law, environmental claims made by companies must be explicit, proportionate, unambiguous, substantiated with specific evidence, and based on scientific proof or recognized methods. Failing to meet these criteria is considered "greenwashing," which involves misleading or unsubstantiated environmental claims. Such practices are governed by the French Consumer Code, and their aim is to provide transparent information about the environmental aspects of products or services.

3.2. Penalties for Misleading Commercial Practices
Penalties for misleading environmental claims or labels are detailed in Article L.132-2 of the French Consumer Code. These penalties may include imprisonment of up to 2 years and a fine of €300,000, which can increase based on benefits obtained from the offense. It may reach up to 10% of the company’s average annual turnover or 50% of the expenses incurred for the misleading advertising. The law no. 2021-1104 (22 August 2021) further increases the maximum fine rate to 80% when misleading practices relate to essential product characteristics, commitments, and environmental claims.

Contacts: Luc Bigel / Hamza Akli

European texts: Solvency II / CDR (EU) 2021/1256

In Germany, the Solvency II Directive has been implemented in national law in the completely revised version of the German Insurance Supervisory Act entered into force on 1 January 2016.

Already in 2019, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistunsgaufsicht, BaFin) had published a fact sheet on dealing with sustainability risks. Even though this had been qualified as a non-binding guidance for the supervised companies, BaFin indicated how the companies being subject to its supervision, should map sustainability risks in their strategies, corporate governance and risk management. The leaflet contains a series of guiding questions and examples that now serve as a guideline for (self-)binding regulations. Accordingly, BaFin has implemented the handling of sustainability risks in the context of strategies, corporate governance and risk management. 

1. Sustainability risk as part of the ORSA

In the area of banking supervision, BaFin has already incorporated this into the circular on the minimum requirements for risk management (MaRisk), which formally only qualifies as a self-commitment on the part of the authority, but in fact clearly sets out BaFin's expectations to the authorised companies. According to this circular, when assessing the materiality of the risks to me managed “the management must obtain an overview of the institution's risks on a regular and ad hoc basis as part of a risk inventory, whereby the impact of ESG risks must be appropriately and explicitly included (overall risk profile).” It is to be expected that the corresponding circular on the minimum requirements for the governance systems of insurance companies (MaGo) will also explicitly address the corresponding consideration of ESG risks in connection with risk management in the next revision.

When comparing the solvency requirement with the regulatory the regulatory capital requirements as part of the internal risk and solvency assessment of insurance companies (ORSA), the supervised companies should analyse the specific risk the specific risk profile including the sustainability risks identified as material considering the EIOPA application guide on climate change materiality assessments and climate change scenarios in ORSA setting out supervisory expectations on the integration of the use of climate change scenarios by insurance undertakings in their Own Risk and Solvency Assessment ORSA. 

The German Insurance Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft) has published an update on the practical approaches for implementing the regulatory requirements end of March 2023. This guideline covers the following aspects: scenarios and modules with regard to describing the climate change, methods of assessing the scenarios including their impacts on the areas of asset management personal insurance and on property and casualty insurance.

2. Sustainability as part of the variable remuneration

It is BaFin’s view that remuneration policies play an important role on the way to the transition for green growth. Sustainable criteria, including but not limited to ESG, should be incorporated into remuneration decisions. This is in the spirit of consistent risk management. The basis for the selection and weighting of the criteria should be the corporate strategy of the respective insurance company. In this context, BaFin has conducted a Q&A session. Based on the outcome, there might be a further update on the circular disclosed. However, there is still no concrete decision from the supervisory authority on this.

3. Greenwashing 

According to the Sustainable Finance Strategy of the German regulator. BaFin indicated that, when it comes to aspects of greenwashing, ie practices of providing information on sustainability that does not clearly and fairly reflect the sustainability profile of a company, a product or a service, BaFin will make full use of the supervisory tools at its disposal: 

  • In product and market supervision, BaFin monitors compliance with transparency and disclosure requirements on ESG impacts (in particular the SFDR and Articles 5 to 7 of the Taxonomy Regulation). 
  • In its supervision with regard to conduct of business, BaFin pays particular attention to companies’ implementation of the distribution requirements under the delegated regulations on the Insurance Distribution Directive (IDD). As part of its financial reporting enforcement, BaFin will monitor compliance with the CSRD transparency requirements.
  • BaFin’s solvency supervision (Pillars 1 and 2 of the frameworks for insurers under Solvency II) addresses the appropriate management of transition and physical risks and the corresponding transparent disclosure (Pillar 3).

Gunne Bähr / Volker Lemmer

European texts:  Solvency II / CDR (EU) 2021/1256 / CDR (EU) 2021/1257

In Ireland, the Solvency II Directive has been transposed by European Union (Insurance and Reinsurance) Regulations 2015 (S.I. 485 of 2015) and the Commission Delegated Regulations (EU) 2021/1256 and (EU) 2021/1257 apply in Ireland and other Member States automatically without the need for further action.

CDR (EU) 2021/1256 amends Solvency II by incorporating sustainability factors into an insurer’s risk management system. It identifies 4 areas where sustainability risk must be integrated:

  1. Identify and assess emerging risks and including this is in the risk management system.
  2. Consider overall solvency needs when a firm assesses its forward-looking assessment.
  3. Having the remuneration policy provide for the integration of sustainability risks into risk management systems.
  4. The “prudent person principle” when insurers invest in assets or assess risks stemming from investments.

CDR (EU) 2021/1257 amends CDR (EU) 2017/2358, it introduces the concepts of “sustainability preferences” and “sustainability factors” and provides for conduct of business rules and information requirements for the distribution of insurance-based investment products. 

Sustainability preferences’ means a (potential) customer’s choice to one or more of the following insurance-based investment products:

  • the (potential) customer determines a minimum proportion which should be invested in environmentally sustainable investment product(s);
  • the (potential) customer determines a minimum proportion which should be invested in sustainable investment product(s);
  • the (potential) customer determines qualitative or quantitative elements of principal adverse impacts on sustainability factors of an investment product.

In addition to the above, insurance undertakings and intermediaries:

  • should collect the (potential) customer’s suitability preferences when performing the suitability assessment;
  • a suitability state should be issued which includes information on how the proposed insurance-based investment product suits the customer’s sustainability preferences;
  • should not recommend any insurance-based investment product which does not meet the (potential) customer’s suitability preferences;
  • should record decision and reasons for the decision of the (potential) customer, where their sustainability preferences are adapted since no insurance-based investment product met their original sustainability preferences. 

Contacts: Naoise Harnett / Lindi Raath | DLA Piper

European texts: Solvency II / CDR (EU) 2021/1256

The Solvency II Directive has been implemented in Italy by legislative decree No. 74/2015, which amended the Italian Insurance Code (i.e., legislative decree no. 209/2005).

Additionally, some specific Regulations have been adopted by the Italian Insurance Authority. Inter alia, IVASS Regulations specifically referred to ESG criteria are:

  1. IVASS Regulation no. 24/2016, concerning investments and assets covering technical provisions (amendments aimed at integrating sustainability risks into investment and risk management activities);
  2. IVASS Regulation no. 38/2018, concerning the corporate governance system (amendments aimed at integrating sustainability risks into the sustainability risks into the risk management system and remuneration policies);

These two Regulations has been recently amended and integrated by IVASS Provision no. 131/2023.

As to IVASS Regulation no. 24/2018, the key amendments are the following: 

  1. Introduction of definition of “sustainability factors”, “sustainability preferences” and “sustainability risks”; 
  2. The “prudent person principle” will be integrated;
  3. The assets and liabilities management policies, the liquidity risk management policy, the concentration risk management policy and the investment policy will have to be integrated with the consideration of the sustainability risks.

As to IVASS Regulation no. 38/2018, the key amendments are the following: 

  1. The risk management policy will include also strategies, processes and procedures necessary to identify sustainability risks, providing opinions about the impact of such risks on the business in the following years;
  2. Also remuneration policies will consider sustainability risks. 

The CDR 2021/1256 does not necessitate incorporation into national laws.

In the Netherlands, the Solvency II Directive has been implemented by the Dutch Financial Supervision Act (Wet op het financieel toezicht) and regulations pursuant thereto. The most relevant acts and regulations in relation to this guide are:

  • Dutch Financial Supervision Act (Wet op het financieel toezicht - Wtf)
  • Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Besluit Gedragstoezicht financiele ondernemingen Wft) – This Decree relates to rules concerning conduct of business supervision of financial undertakings in the Dutch market.
  • Decree on prudential Rules for Financial Undertakings under the Wft (Besluit prudentiele regels Wft)


In relation to supervision of financial institutions, the Dutch Authority for the Financial Markets (Autoriteit Financiele Markten, the “AFM”) is responsible for conduct supervision and the Dutch Central Bank (De Nederlandsche Bank, “DNB”) for prudential supervision. AFM’s most important tasks relate to transparent product development, fair and understandable information provision, adequate choice guidance and quality of advice, also in relation to insurance products. DNB's prudential supervision focuses on the financial soundness and stability of (amongst others) insurers, and protecting the rights of insureds. In the Netherlands, the DNB is the primary supervisor of insurers and in that regard also supervises risk management aspects and issues relevant guidance on climate commitments for the insurance sector.

Update on the supervisory theme of sustainability risksOn 30 July 2023, DNB published the self-assessment for a survey on sustainability risks that was largely based on the guide that was published in March. The DNB has published the outcome of the survey in relation to pension funds on 22 December 2023: Sectorial overview controlling ESG-risks.

Guide for controlling climate and environmental risks - On 30 March 2023, the DNB released a new guidance for the financial sector that includes focal points and good practices on managing climate and environmental risks. This guidance is used in the supervision of climate and environmental risk management, and emphasizes that addressing climate and environmental risks are part of a financial institution’s controlled and sound business operations, which is required further to article 3:17 Dutch Financial Supervision Act (Wet op het financieel toezicht, “FSA”). With the guidance, the DNB is following the recommendation of the Network for Greening the Financial System (NGFS) to establish "supervisory expectations" in relation to addressing climate and environmental risks. Climate change and environmental degradation do not only affect financial institutions themselves but also impact on climate and the environment with their activities. This is also referred to as dual materiality. Dual materiality is defined as impact materiality and financial materiality. Impact materiality deals with the impact of the institution on people and the environment, whereas financial materiality refers to the impact of people and the environment on an institution's financial performance.

The DNB has identified four areas in the guidance, which may be of relevance to establishing a risk control framework in relation to climate risks. The focus areas relate to (i) business model and strategy, (ii) governance, (iii) risk management and (iv) information provision.

Assessing ESG outcomes at insurers - In December 2022, the DNB conducted on-site investigations with a number of insurers to investigate ESG risks and more specifically, the integration of ESG into investment policy, strategy, insurance risk and risk management cycle. With these studies, the DNB is implementing its ambition to fully integrate sustainability into all the elements of its mission.

Q&A on climate risks – in 2021, the DNB provided a detailed response to the question whether insurers have to take climate related risks into account. In its response, the DNB refers to good practices on including climate risks in the ORSA, EIOPA guidelines and its general report on climate risks: Waterproof? An exploration of climate-related risks for the Dutch financial sector (and in Dutch: De Nederlandse financiele sector veilig achter de dijken?). This Q&A was translated into English in June 2023: Q&A Climate-related risks and insurers.

Good Practices on integrating climate related risks in the Own Risk and Solvency Assessment (ORSA) / Good Practices on integrating climate related risks in the ORSA (English version) -  In 2019, the DNB published these Good Practices on including climate risks in the ORSA, emphasizing that climate related risks may translate into physical and transition risks, since insurers may become subject to the physical consequences of changing climate (physical risks) and the transition to a climate neutral economy (transition risks). In 2021, the DNB published the results of a thematic research on the integration of the climate-related risks in the ORSA: The Impact of climate-related risks for insurers


Contact: Paul Hopman | DLA Piper Aline Kiers | DLA Piper


European texts: Solvency II / CDR (EU) 2021/1256

Norway implemented the Solvency II Directive through;

  • The Financial Undertakings Act (Nor, “Finansforetaksloven”), and
  • The Solvency II Regulation (Nor, “Solvens II forskriften”). The Regulation mainly contains provisions that reference the level II acts under Solvency II that apply in Norway, including CRD (EU) 2021/1256.

In their report from the supervisory areas, the Norwegian Financial Supervisory Auhtority (NFSA) highlighted that climate risk was a topic that was covered in all ordinary supervision of insurance undertakings in 2022 (the report for 2023 has yet to be published). Also, the NFSA has held specific meetings covering climate risk with certain large non-life insurance undertakings with the aim to map how climate change could affect the non-life undertaking’s risk and how they can manage this risk.

The NFSA expressed an expectation from insurance undertakings in their management of climate risk, both physical risk and transition risk, which is reflected in the NFSA’s risk module for evaluating the companies’ management and control. The companies are also obligated to assess climate risk in their annual report on self-assessment of risk and solvency (ORSA, “Årlig rapport om egenvurdering av risiko og solvens”).

Contacts: Hugo-A. B. Munthe-Kaas, Head of Compliance | DLA Piper / Marthe Oldernes, Associate | DLA Piper

The EU's Solvency II regime came into force in the UK on 1 January 2016 and was implemented through a mixture of legislation, regulation and new rules in the PRA Rulebook and the FCA Handbook. A wide-ranging review of the Solvency II framework in the UK is currently under way, following the UK’s exit from the EU.

No amendments have been made to the PRA Rulebook to implement prudential supervision of insurers' managing of climate change related risks in the UK, as CDR (EU) 2021/1256 has no application in the UK. However, the PRA has considered financial risk arising from climate change in the context of existing provisions of the PRA Rulebook, such as Fundamental Rules 5 ("A firm must have effective risk strategies and risk management systems") and 6 ("A firm must organise and control its affairs responsibly and effectively").

The PRA’s Supervisory Statement SS3/19, Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change sets out its expectations of how insurers should manage climate-related financial risks in compliance with their existing legal and regulatory requirements. The PRA actively supervises insurers against these supervisory expectations.

The expectations in SS3/19 are intentionally high level, to reflect the fact that firms' practices will continue to develop and mature over time. As firms' expertise develops and best practice becomes clear, the PRA anticipates that it will update its expectations. Firms are expected to take into account the evolving understanding of what best practice looks like.

The PRA wants to see firms taking a strategic approach to managing the financial risks from climate change. This means considering current risks, as well as those that can plausibly arise in the future, and identifying the actions required today to mitigate the current and future financial risks. Each firm should take a proportionate approach in line with the nature, scale, and complexity of their business, and build this into their existing risk management strategies.

In Supervisory Statement SS3/19, the PRA explains how effective governance, risk management, scenario analysis and disclosures can be applied by firms. In summary, firms are expected to:

  • Fully embed consideration of climate-related financial risks into their governance arrangements
  • Incorporate climate-related financial risks into existing risk management practice
  • Use (long-term) scenario analysis to inform strategy setting, risk assessment and risk identification
  • Develop and maintain an appropriate approach to the disclosure of climate-related financial risks.

In its “Dear CEO letter” of 22 October 2022, the PRA commented that:

  • Boards should be able to demonstrate they understand how their firm is integrating climate considerations into their business strategies, planning, governance structures and risk management processes, including available metrics and risk appetites, in view of each firm’s vulnerabilities to climate risk.
  • Firms should have a counterparty engagement strategy. This engagement should inform firms about how their counterparties manage climate exposures, for example by developing new products and services.
  • All firms should be able to explain to their supervisors how material climate risks are appropriately capitalised. Sufficient contextual information must appear in firms' own risk and solvency assessments (ORSAs).
  • Firms should be able to show that they have embedded scenario analysis into their risk management and business planning processes and are able to demonstrate how the results are being used in practice.

The Bank of England’s Climate Change Adaptation Report (CCAR) of October 2021, as updated in March 2023 set out findings on industry progress and reflections on the links of climate-related risks and the regulatory capital frameworks.

Good practices that have been identified by the Bank of England and the PRA include: 

On board oversight and responsible senior managers:

  • For international firms, monitoring climate-related metrics across regions and cascading MI across relevant governance forums. 
  • Embedding climate risk factors into strategic planning activities and senior remuneration targets.
  • Linking scenario analysis outputs to business strategies.
  • Firm-wide training to build capabilities.
  • Continuing development of the scope, quality, and frequency of climate-related information provided to senior committees.

On Risk Management:

  • Implementing risk management frameworks and a well-defined, quantitative risk appetite statement, which effectively support a firm in identifying, measuring, monitoring, managing, and reporting climate risks.
  • Demonstrating that climate risks have been appropriately factored into quantitative analysis eg through properly developed quantitative climate risk modelling capabilities, appropriate metrics and the use of prudent assumptions and proxies where data gaps exist.
  • Having a counterparty engagement strategy that informs firms about how their counterparties will look to manage climate exposures, eg by developing new products and services as they change the footprint of their business over time.
  • Providing sufficient contextual information in ORSAs to allow a reader to understand analysis of climate risks and capital.

On Scenario analysis: 

  • Considering uncertainty in climate risk analysis, and taking this into account when using results, eg through the use of prudent assumptions, manual adjustments or sensitivity analysis to understand how results would change if events play out in different ways.
  • Modelling a wide range of physical vulnerabilities in assessments of underwriting risk and identifying and addressing limitations of any third-party models used.

On Disclosure: (Firms have generally made good progress in this area, but need to continue to evolve their disclosures as they develop their understanding of the climate risks relevant to their business)

  • Publishing TCFD format disclosures in, or linked to, a firm’s “mainstream filings” and employing a consistent and integrated approach across all forms of annual reporting – eg by providing consistent messaging across financial reports, standalone climate disclosures, and Solvency II Pillar 3 disclosures, with cross-referencing where required to avoid duplication and facilitate accessibility.

The S in ESG

As regards social rights, PRA and FCA have released Consultation Papers proposing new rules on Diversity and Inclusion (D&I) in the financial sector. We expect these new rules and expectations to be finalised in 2024, with implementation slated for the following year. The proposals cover all PRA and FCA-authorised firms and include reporting annual employee numbers. Larger firms and Solvency II insurers are expected to be subject to more extensive obligations regarding D&I policies and disclosures.

For larger firms, the proposed rules aim to foster a diverse and inclusive culture to mitigate groupthink risks, enhance decision-making, and better understand customer needs. The proposed requirements include having D&I strategies, setting realistic targets, reporting numerical data to the FCA, making public disclosures, and treating D&I as a non-financial risk. The deadline for consultation responses is 18 December 2023, and we expect the final rules to be issued in 2024, taking effect one year later. 

Further considerations apply to firms operating in the Lloyd’s market. These are outside the scope of this Guide, but if you have any Lloyd’s market-related queries, please do not hesitate to contact us.

Contacts: George Mortimer /  Matthew Hunter | DLA Piper

More from the guide