Prudential surcharge on fossil fuel assets (Solvency II)
An additional capital requirement proposed by EIOPA on the fossil fuel equities and bonds held by European insurers, intended to reflect their higher transition risk.
The Solvency II standard formula calibrates its market shocks on price history, yet transition risk, the loss of value of a business doomed by decarbonization, does not appear in that history yet. The directive's review therefore tasked EIOPA with examining whether assets linked to environmentally harmful activities deserve dedicated treatment. The authority answered with data, not principle: it found that equities and bonds of coal, oil and gas extraction companies, identified by their industry code, carry higher transition risk than other sectors. It proposes an additional shock on equities and a multiplier on the spread risk of bonds. It is only a recommendation: adoption requires a delegated act from the Commission.
In its final report of November 7, 2024, on the prudential treatment of sustainability risks, EIOPA recommended an additional 17-point shock on fossil fuel equities (56% for type 1 equities) and a multiplicative surcharge of up to 40% on the spread capital charge for fossil fuel bonds; Fitch estimated the impact on solvency ratios at generally less than 100 basis points.
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