EU climate policy with huge impact on insurance based investment products

With the target of making Europe climate-neutral by 2050 the European Union is publishing some regulations with direct impact on the products of the financial market.

Keyword Sustainable Finance

The basis is the “Regulation to facilitate sustainable investment” 2020/852 EU that was published on June 18th, 2020. It is also called briefly Regulation on “Taxonomy” or “Sustainable Finance”. It makes a classification which investments are in compliance with the six environmental objectives:

  • climate change mitigation,
  • climate change adaptation,
  • sustainable use and protection of water and marine resources,
  • transition to a circular economy, waste prevention and recycling,
  • pollution prevention and control and
  • protection of healthy ecosystems

and will therefore be considered as sustainable investments. The first two objectives will apply from January 1st, 2022, the four remaining from January 1st, 2023. The classification of concrete investments (for instance decarbonisation) and benchmarks (e.g. the 2° C limitation of global warming) is being prepared.

In most cases, investments mean the use of foreign capital as bonds, credits, share capital, which can be offered to investors also as packaged products, for instance for saving money for future pensions. Therefore the Regulation on “Taxonomy” is accompanied by Regulation 2019/2088 “on sustainability‐related disclosures in the financial services sector”. This one has already been published and will apply from March 10th, 2021. There is a deadline for implementing the technical standards of details to be disclosed until January 1st, 2022. The Regulation stipulates full information and transparency on sustainable investments and activities including risks and adverse impacts resulting therefrom and will focus in the first instance on the field of “energy efficiency”. This is valid for the activities of the companies working in the financial sector as well as for the promotion of financial products and advice given in connection with them.

Effects on life insurance

Part of the financial products are Insurance based investment products (IBIP), i.e. life insurance products the value of which is exposed to market fluctuations. Among them we find unit linked or index linked insurances but also traditional life insurances and pension schemes. There is a dispute in some countries whether classical life insurances without explicit connection to an investment product belong to these, but the matter stands without clarification so far. All these products will have to offer in future information on the sustainability of the underlying investment or on the distribution of the investment portfolio according to the criteria of the Regulation, in addition to the existing information on capital security, interest rates, portfolio distribution to branches and countries and similar data. It may be expected that there will be numerous new products with sustainability as their main feature.

This leads to an extension of the advice offered by the insurance intermediary. Besides questioning the client in respect of his economical demands and needs he has to find out also the client’s ideas and preferences in respect of sustainable investments and must offer him adequate products. Of course, the “Best Advice” principle applies, the important aspect is to find the best financial solution for the client. Sustainable products that are more expensive than traditional products or have a higher capital and revenue risk can be placed only upon clear order of the client. This shall be stipulated by a third EU regulation in connection with the Insurance Distribution Directive (IDD), the details of which are currently under discussion.

We shall continuously report on further changes and developments regarding financial products.

The article is written by Andreas Krebs.

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Paul Spittau

Head of Group Carrier Relations & Insurance Mediation

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