ESG becoming more vital for insurers
Extra risks and uncertainty from climate change mean underwriting is becoming more complex for insurers, who are now becoming more active on ESG
ESG is becoming a more vital topic for insurers to focus on as regulators, investors and consumers become more aware of key sustainability trends, according to a recent Moody’s Investors Service report.
Insurers are actively incorporating ESG analysis into their investment portfolios. For example, Moody’s 2018 survey on European insurers’ approach to ESG factors highlighted that the majority of insurers have adopted screening techniques to avoid investing in assets that do not meet ESG criteria.
There are more insurers taking a proactive approach to minimize exposure to carbon transition risks. A number of European insurers have adopted a policy of not investing in sectors that are linked to thermal coal due to the significance of CO2 emissions and wanting to move towards a sustainable economy.
Swiss Re, AXA, Aviva, Allianz, Zurich, QBE and SCOR have decided to stop insuring clients in thermal coal-dependent industries. Insurers’ thermal coal exclusionary policies are not expected to cause meaningful losses to their business, but instead, they should benefit from reducing their exposure to potential environmental liability risks associated with thermal coal industries.
Historically, insurers have limited their underwriting exposure to sectors such as weapon manufacturers due to ESG concerns. A number of commercial property and casualty (P&C) insurers have started to incorporate a comprehensive ESG risks analysis into their underwriting process.
Natural and manmade hazards are the dominant environmental risk for P&C insurers. This reflects their insurance of property and corporate supply chains, which can both be severely affected by natural catastrophes.
Climate change makes underwriting more complex and adds an extra layer of risk modelling and pricing uncertainty. Annual repricing of most property and casualty insurance policies will allow insurers and reinsurers to adjust to the rising frequency and severity of natural catastrophes. However, challenges remain as it is difficult to appropriately price risk in the event of increasing volatility, and therefore uncertainty, in frequency and severity trends.
Regulators and policymakers are increasingly focused on insurers’ resilience to the effects of climate change. They are pushing the agenda in integrating climate change considerations in insurers’ regulatory capital requirements.
The UK’s Prudential Regulatory Authority (PRA) recently stated that it will require UK insurers to consider how their business would be affected in different physical and transition risk scenarios. As a result, insurers will experience higher compliance costs and increase the risk of regulatory non-compliance.
Insurers focused on life and savings products are generally more exposed to social risk, particularly related to demographic and societal trends. Aging populations, increasing urbanization and rising wealth levels are key demographic trends that create both challenges and opportunities for insurers. An aging population increases demand for retirement and savings products, as well as for health cover.
Insurers are also exposed to challenges such as changes in regulation and political risks driven by social factors. For example, in South Africa, the government is planning to implement a national health insurance plan, which will limit the size of the private health insurance market.
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