Biodiversity Risk Management Report
The European Insurance and Occupational Pensions Authority (EIOPA) releases biodiversity risk management report, aimed at providing guidance for insurance companies to identify, measure, and manage biodiversity risks.
EIOPA believes that the insurance industry has significant exposure to investments in assets related to natural and ecosystem services, and biodiversity risks can affect investment value and underwriting losses, as well as generate financial risks.
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Background of Biodiversity Risk Management
The Network for Greening the Financial System (NGFS) believes that biodiversity loss and natural risks may have significant impacts on macroeconomics and finance and generate sources of risk for financial stability. The Organization for Economic Co-operation and Development (OECD) estimates that global ecosystem service losses range from approximately $6 trillion to $11 trillion annually. EIOPA finds that 30% of insurance companies’ bond and stock assets are highly dependent on at least one ecosystem service and face biodiversity risks.
In December 2024, EIOPA launched a public consultation to collect recommendations from stakeholders on biodiversity risk management actions in the insurance industry. Public consultation shows that the insurance industry is aware of the impact of biodiversity risks on investment and underwriting activities, but there are differences in quantifying biodiversity risks and addressing the relationship between climate change and biodiversity. The Insurance and Reinsurance Stakeholder Group believes that biodiversity risks need to be phased into the risk management framework of insurance companies.
Biodiversity Risk in the Insurance Industry
Based on information from the EU Taxonomy, Taskforce on Nature-related Financial Disclosures (TNFD), and European Sustainability Reporting Standards (ESRS), biodiversity risks can be classified into the following categories:
- Physical risk: Risk of asset degradation or loss of natural and biological diversity.
- Transition risk: Natural economic transition poses a risk to the business model or profitability of the enterprise.
- Legal and operational risk: Biodiversity related fines, litigation, or reputational risks.
Insurance companies mainly bear biodiversity risks through their investments and liabilities, such as an increase in the likelihood of claims due to increased biodiversity risks faced by enterprises, and a decrease in investment value due to a decrease in the value of enterprise assets. The phenomena and actions of natural disasters, resource depletion, asset depreciation, and legal litigation not only have an impact on the insurance industry but may also be transmitted to the financial system. These risks may exceed the biodiversity risk exposure of insurance companies.
Biodiversity Risk Management in the Insurance Industry
The European Insurance and Occupational Pensions Authority’s investigation of insurance companies finds that the identification, measurement, and management of biodiversity risks are still in the early stages. Among more than 700 insurance companies surveyed, one-fifth mention biodiversity, but most are qualitative analyses. Most respondents believe that biodiversity risks will have an impact, but they are still emerging risks.
Biodiversity risks are often mentioned together with issues such as pollution, resource utilization, and circular economy. Although geographic information and other data can be obtained, biodiversity risks are often difficult to quantify, and many respondents consider them as reputational risks. The European Insurance and Occupational Pensions Authority believes that biodiversity risk management in the insurance industry can be divided in the following directions:
- Regulatory agencies collaborate with stakeholders to identify priority areas for action, improve data collection, develop biodiversity risk management models and plans, and enhance risk management capabilities.
- Consider the synergistic effect of climate change and biodiversity, incorporate both climate and natural factors into the risk model to reduce the natural disaster risk gap for insurance companies.
- Promote industry capacity building, share insights and practical experience in biodiversity risk management.
Reference:
Report on Biodiversity Risk Management by Insurers
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