Fitch reveals the impact of fossil fuel surcharges on insurer ratings

Proposed capital surcharges targeting fossil fuel-related assets are unlikely to affect the ratings of European insurers, according to Fitch Ratings. The surcharges, recommended by the European Insurance and Occupational Pensions Authority (EIOPA), aim to address transition risks associated with fossil fuel investments.

“The surcharges would have a limited impact on Solvency II (S2) ratios due to companies’ low direct exposures to fossil fuel-related equities and bonds, and there would be no impact on capital scores from Fitch’s Prism Global model,” a news release noted.

EIOPA’s recommendations include increasing risk charges by up to 17 percentage points for certain equities and imposing an additional 40% charge on corporate bond spreads tied to fossil fuel-related assets. However, Fitch reported that the measures would have a minimal impact on S2 ratios.

The assessment showed that average reductions in S2 ratios across countries were typically less than 100 basis points (bp). Norway recorded the highest average impact at 173 bp, reflecting its relatively higher exposure to oil-related investments. Italy experienced the next highest impact at 134 bp. Fitch noted that the changes are not significant in solvency terms.

Impact of fossil-fuel capital surcharges, Equity surcharge (+17pp)

Source: Fitch Ratings, EIOPA

The surcharges will be reviewed by the European Commission before implementation, the news release noted. Fitch anticipates that, if enacted, insurers would likely accelerate the divestment of fossil fuel-related holdings.

According to Fitch, climate-related risks are not explicitly captured within the Prism model. However, exposure to natural catastrophe risk, which is influenced by physical climate change, is considered an explicit input.

Such risks may also impact the scoring of rating drivers outside the model if they are deemed sufficiently foreseeable and material. For instance, excessive exposure to natural catastrophe risk, and consequently to physical climate change risk, could influence evaluations of financial performance and earnings due to claims volatility, as well as assessments of a company’s profile because of associated business risks. Additionally, significant exposure to real estate investments vulnerable to transition risks may affect assessments of an insurer’s investment and asset risk.

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