Asian insurers may soon have to set a dedicated prudential treatment for insurers’ fossil fuel assets to cushion against transition risks in the wake of recommendations from the European Insurance and Occupational Pensions Authority (EIOPA).

In recent years, Asian regulators – particularly those in Hong Kong, Singapore and Japan – have drawn inspiration from the EIOPA’s Solvency II framework, a comprehensive regulatory regime for insurance companies in the European Union designed to ensure adequate capital levels and risk management practices.

On November 7, the EIOPA published its final report on the prudential treatment of sustainability risks within Solvency II, recommending additional capital requirements for fossil fuel assets on European insurers’ balance sheets to accurately reflect the high risks of these assets.

The report follows a mandate given by the European Commission to the EIOPA, the association says, to assess the potential for a dedicated prudential treatment of assets and activities associated with environmental or social objectives or those that harm such objectives.

However, Asian regulators generally adapt the Solvency II framework rather than fully adopt them, tailoring regulations to fit their markets’ specific needs and circumstances. Japan, for example, implemented the Economic Value-Based Solvency Regulation in 2025, aligning with some Solvency II principles but customized for the Japanese market.

In any case, the findings of the EIOPA report cover three distinct areas: the market risk of assets exposed to the climate transition, the impact of climate risk-related prevention measures on non-life underwriting risks and the treatment of social risks.

Fossil fuel-related stocks and bonds are more exposed to transition risks than assets connected to other economic activities based on the EIOPA report’s backward- and forward-looking analysis of equity and spread risks.

To ensure that European insurers set aside enough capital to withstand potential losses from investments in assets with high transition risks, EIOPA is recommending additional capital charges for these assets. This approach would better align capital requirements with insurers’ actual risk exposures.

For equities, the EIOPA proposes raising capital requirements by up to 17% in additive terms on top of the current capital charge, leading to a moderate increase in insurers’ capital requirements.

For bonds, the association recommends a capital charge of up to 40% in multiplicative terms in addition to existing capital requirements, instead of introducing no change at all or applying rating downgrades to fossil fuel-related bonds.

In this non-life underwriting, the EIOPA analyzed the extent by which policyholders can directly implement preventive, climate-related adaptation measures (for example, installation of anti-flood doors or fire-proof vegetation around properties) to lower insurers’ underwriting risks.

In terms of social risks, the association is also convinced that all aspects of sustainability risks, including social ones, deserve equal attention from a prudential perspective in the context of the double materiality principle.

The EIOPA has submitted its recommendations to the European Commission, advising it to thoroughly consider the proposals within the broader context of sustainability regulation, including cross-sectoral consistency, potential impacts on transition efforts, and possible evolution of relevant regulatory frameworks. The commission will review the report and consider implementing the proposed additional capital requirements for fossil fuel assets.