Integrating sustainability risks in insurance governance

In line with the EU’s ‘Financing Sustainable Growth’ Action Plan 2018, the European Commission adopted a number of delegated acts which will impact (re)insurance undertakings and insurance distributors.  These changes will apply from 2 August 2022. 

• Commission Delegated Regulation (EU) 2021/1256 amends EU Commission Delegated Regulations 2015/35 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)
• Commission Delegated Regulation (EU) 2021/1257 amends two EU Commission Delegated Regulations; focusing on the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products.

Key changes to Commission Delegated Regulations (EU) 2015/35

Commission Delegated Regulation (EU) 2021/1256 changes the Solvency II Regulations to integrate sustainability factors into a (re)insurers’ risk management system and identifies four key areas in which sustainability risk must be incorporated:

1. In the risk management system, including when identifying and assessing emerging risks.
2. When the institution performs its forward-looking assessment of its overall solvency needs.
3. In the remuneration policy to include information on how it takes into account the integration of sustainability risks into the risk management systems.
4. In the prudent person principle when assessing the risks arising from investments.

Key changes to Commission Delegated Regulations (EU) 2017/2358

Commission Delegated Regulation (EU) 2021/1257 incorporates ‘sustainability factors[1]’ and ‘sustainability-related objectives’ into Commission Delegated Regulations (EU) 2017/2358 which sets the requirements regard to product oversight and governance requirements for insurance undertakings and insurance distributors. The below is a summary of the key new requirements:

1. Manufacturers of insurance products should take into account their sustainability-related objectives in the product approval, target market identification, and product testing stages.
2. Manufacturers of insurance products should assess whether their insurance products remain consistent with their sustainability-related objectives.
3. Manufacturers of insurance products should identify any customer for whom the insurance product is not compatible with their sustainability-related objectives.
4. Insurance distributors should ensure their sustainability-related objectives are taken into account in the product distribution arrangements.
5. Insurance distributors should inform the manufacturer and amend their distribution strategy when they become aware that an insurance product is not in line with their sustainability-related objectives.

Key changes to Commission Delegated Regulations (EU) 2017/2359

Commission Delegated Regulation (EU) 2021/1257 incorporates ‘sustainability preferences’ into Commission Delegated Regulations (EU) 2017/2359 which sets the information requirements and conduct of business rules applicable to the distribution of insurance-based investment products. The below is a summary of the key new requirements:

• Introduced definitions for “sustainability preferences” and “sustainability factors” to Commission Delegated Regulations (EU) 2017/2359. ‘Sustainability preferences’ means a customer’s (or potential customer’s) choice to one or more of the following insurance-based investment products:
  1. A product for which the customer (or potential customer) determines that a minimum proportion should be invested in environmentally sustainable investments;
  2. A product for which the customer (or potential customer) determines that a minimum proportion should be invested in sustainable investments;
  3. A product that considers principal adverse impacts on sustainability factors where qualitative or quantitative elements demonstrating that consideration are determined by the customer (or potential customer).
• Insurance intermediaries and insurance undertakings should collect information regarding the customer's (or potential customer's) sustainability preferences when obtaining information for suitability assessment.
• An insurance intermediary or insurance undertaking should not recommend any insurance-based investment product that fails to meet the customer's (or potential customer's) sustainability preferences. The insurance intermediary or insurance undertaking should explain to the customers or potential customers the reasons and keep records of those reasons.
• Where no insurance-based investment product meets the sustainability preferences of the customer (or potential customer), and the customer decides to adapt his or her sustainability preferences, the insurance intermediary or insurance undertaking shall keep records of the decision of the customer, including the reasons for that decision.
• Insurance intermediaries and insurance undertakings should issue a Suitability Statement that includes information on how the recommendation provided is suitable for the customer’s sustainability preferences.

What are the next steps?

Insurance undertakings and insurance distributors need to become familiar with the changes that are applicable to their business activity and analyse how they will comply with the new obligations.

Firms will need to review and update their existing business plans, systems and policies to incorporate sustainability into their daily operations. Sustainability risks and considerations should also be incorporated across the product lifecycle into in the target market identification, product testing, product approval and product distribution, and stages.

Adequate resources must be available and appropriate staff expertise is required to maintain compliance and eliminate activities that may present risks to preserving sustainability.

Why Grant Thornton

Grant Thornton’s Financial Services Risk, Consulting and Advisory teams are comprised of dedicated experts who are experienced in supporting insurance firms with a variety of regulatory challenges, including those arising from the ESG agenda.

In particular, our industry-leading Prudential Risk, ESG experts and Consulting team understand that regulation continues to drive the strategic agenda for insurance firms. ESG and other sustainability related areas are likely to be high on the regulatory agenda for years to come. They specialise in assisting clients across the financial services sector in navigating through the maze of regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.

[1] ‘Sustainability factors’ means environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters per Article 2, point (24), of Regulation (EU) 2019/2088