Reliable information key to the insurance sector’s ability to apply Green Taxonomy

Tue 20 Sep 2022

The objective of the European Union’s Taxonomy regulation, in force since 1 January 2022, is twofold for the insurance and reinsurance sector. First, to measure the share of investments devoted to financing economic activities eligible for the taxonomy, known as the Investment Ratio. Second, to measure the share of gross premiums written in eligible non-life insurance, or Non-life Underwriting Ratio.

However, in a recent analysis of 11 European Union insurers and reinsurers based on the regulation’s first financial year, a lack of eligibility ratios of non-financial companies subject to the Taxonomy regulation meant the share of eligible investments on these counterparties had to be estimated. As such, most of the insurers and reinsurers in the panel indicated that they use an external data provider such as Carbon4 or ISS ESG, allowing them to determine their voluntary ratio based on estimates.

In contrast, the mandatory ratios for investments are relatively homogeneous, between 0% and 10% and up to 15% for AXA and MAIF. This is mainly due to the methodology adopted for identifying eligible assets in the portfolio, particularly real estate assets.

Investment ratio methodology and eligibility

In terms of methodology, most insurers have opted for a detailed description of the assets covered, and the exclusions applied. For example, 80% of insurers and reinsurers in the panel have excluded the amount of their exposure to central governments, central banks and supranational issuers from the denominator. Just under 10% of insurers and reinsurers in the panel chose to exclude unit-linked funds from their analysis, whereas 27% explicitly indicated the inclusion of the amount of cash and cash equivalents in the assets covered.

Regarding the nature and scope of the assets considered eligible, 82% of insurers and reinsurers in the panel provide details of eligible real estate assets, 18% on infrastructure funds, 9% on green bonds and 9% on forest assets. 

Diverse non-life underwriting ratio results

The non-life underwriting ratios published by the insurers and reinsurers of the panel for the 2021 financial year are very heterogeneous: between 0% and 86%. This diversity is mainly linked to the nature of the main activity of the various players in the sector: life insurance, non-life insurance, health and protection insurance, credit insurance, or reinsurance.

In accordance with the Taxonomy regulation, only the provision of non-life insurance and reinsurance services related to the underwriting of climate-related perils are considered as contributing to climate change adaptation. The market practice has been to consider all gross written premiums relating to the three non-life business lines defined by the Solvency 2 Directive that can offer explicit insurance coverage against natural catastrophes. Namely, Motor insurance (other than third party liability insurance), marine, aviation and transport insurance and fire and other property damage insurance.

Focus on reliable information

Applying the Taxonomy regulation is set to become a real challenge for insurance and reinsurance institutions. While the first set of information published is relatively homogeneous, the ability of insurers and reinsurers to gain access to the relevant information available on eligibility and the alignment of their activities and their investments will need to be improved. 

Due to the strengthening of obligations in terms of extra-financial reporting related to the Corporate Sustainability Reporting Directive (CSRD), insurers and reinsurers will need to adapt their reporting systems, tools and information to produce reliable information efficiently.

*For more information, please refer to Les cahiers sectoriels de la taxonomie #2 : secteur Assurance (available in French).