Eligibility ratios in the insurance sector: improved practices based on recommendations issued by regulators

Thu 02 Nov 2023

2023 marks the second year in which insurance and reinsurance companies have published their eligibility ratios for the European Green Taxonomy. For the insurance sector, the objective is to measure the proportion of investments, as well as the proportion of gross premiums collected in non-life insurance, dedicated to financing economic activities in accordance with the Taxonomy Regulation.

There are two new features in this 2023 publication. The first concerns investment ratio, insurers and reinsurers benefit from a one-year step back on the data published in 2022 by companies subject to the NFRD of their eligibility ratio on two indicators, namely turnover and capital expenditure (CAPEX). Secondly, since July 2022, a supplementary delegated act has made it compulsory for financial undertakings to publish information on their exposure to fossil gas and nuclear power generation activities (qualitative and quantitative information).

Capital expenditure ratio

Unsurprisingly, regulatory ratios are up on last year. This is due to several factors including the inclusion of real estate and forestry assets for panel members who did not do so last year, or did so only partially, as well as the greater transparency for certain funds that may hold eligible assets and the inclusion of data published by companies subject to the NFRD.

In fact, the regulatory ratios are on average 13% this year (both those calculated on the basis of turnover and those calculated on the basis of capital expenditure) compared with an average of 7% last year.

Overall, regulatory ratios calculated based on turnover are relatively similar to those calculated on the basis of capital expenditure.

Scope of assets included in the numerator

As was the case last year, when the Taxonomy Regulations were first applied, we are seeing relatively uniform interpretations of eligible assets.

Generally, all the insurers on the panel provide details on the scope and nature of the assets considered eligible. However, the information published may vary considerably from one insurer to another.

Non-life underwriting ratio

The non-life underwriting ratios published for the 2022 financial year are very mixed, as was the case last year. Indeed, for 2022, the results were between 0% and 77% (compared with between 0% and 79% last year). This heterogeneity is mainly linked to the nature of the core business of insurance and reinsurance companies: life insurance, non-life insurance, health & provident insurance or reinsurance.

Market practice is to consider as eligible all gross written premiums relating to the three lines of business defined by the Solvency 2 Directive, namely other motor vehicle insurance, marine, aviation and transport insurance, as well as fire and other property damage insurance.

For future publications, insurance and reinsurance companies should analyse all of their products sold in order to identify those that cover climatic perils in the other lines of business defined by the Solvency 2 Directive. This particularly applies to medical expense insurance, income protection insurance, workers’ compensation insurance and assistance.

Conclusion

This second year of publication of eligibility ratios has revealed an overall trend towards improved practices based on recommendations issued by regulators. Indeed, there is improved transparency through the publication of additional information on the calculation methodology used and details on the scope of eligible assets used. In addition to this, voluntary ratios are gradually being phased out.

Differences of opinion remain nonetheless, particularly regarding the treatment of exposures to companies subject to the NFRD and the inclusion of data published by the underlying companies. In view of the alignment ratios to be produced in 2024, insurers will face major operational challenges including collecting the alignment ratios from the underlying businesses for calculating the Investment ratio, with a major challenge in terms of the quality of the data collected and its interpretation. Another obstacle will be carrying out the alignment analysis on directly held property and forestry assets and anticipating the validation of all the technical criteria. Further, completing the alignment analysis on sales for the underwriting ratio will also prove itself to be a hurdle, particularly regarding the five cumulative technical criteria that will have to be analysed at product level and not at individual contract level.

Finally, it should be noted that consultations are underway to modify the list of activities included in the Taxonomy Regulation for the first two climate objectives, by including equipment manufacturers, aeronautics, and climate risk consulting in particular.