The European Insurance and Occupational Pensions Authoritys (EIOPA) recent sustainability proposals could have far-reaching implications for insurers, Willis Towers Watson (WLTW) has warned.
Published last November, it is thought that the proposals could impact risk and actuarial functions, investment strategies, product pricing, design and sales processes.
By forcing insurers to integrate sustainability risks, WLTW said the new rules could also result in amendments to Solvency II and the Insurance Distribution Directive (IDD).
"Investment portfolios will also need, where relevant, to reflect policyholders' environmental, social and governance (ESG) preferences," WLTW senior director, Keith Goodby, said.
"Insurers should account for sustainability risks when assessing the security, quality, liquidity and profitability of the portfolio as a whole in the light of the prudent person principle."
In terms of risk management, WLTW said insurers would need to consider both physical and transitional climate risks, as specified by the Task Force on Climate-Related Financial Disclosures.
These should also feature in own risk and solvency assessments (ORSA), with the EIOPA expecting "greater quantitative rigour" given the availability of different scenarios.
For the IDD, sustainability will need to be included in assessments to identify possible conflicts of interest that might adversely impact the interest of customers and lead to miss-selling.
A possible example cited by WLTW included differences between product investment strategies and policyholders' ESG preferences.
And this could be more onerous than it appears, with insurers compelled to offer a range of ESG products to cover the potential range of preferences from its customers.
"EIOPA's proposals represent the biggest and most ambitious step forward in sustainable investment policy for insurers to date," Goodby continued. "Timing as always will be critical.
"The sooner action is taken, the larger the opportunity in de-risking balance sheets and portfolios, however, the proposals are likely to impact businesses far beyond investment policy."
