The ASEAN region will have to find more than $800 billion of investment for energy supply in order to meet its expected demand for power in 2050, according to a new report by Malaysian Re.
The 2022 ASEAN Insurance Pulse report by the reinsurer says that risk managers, risk takers, investors, and the insurance industry will play a key role in facilitating the region’s transition towards a low-carbon economy.
Zainudin Ishak, president and chief executive officer of Malaysian Re, said: “In December 2021, Malaysia was hit by the Great Malaysian Flood (GMF 2021), the most deadly and expensive natural catastrophe in our history. Also in December, the Philippines and Vietnam were struck by typhoons while across the region and in South Asia, we experience more and more devastating rainfalls during monsoon seasons.”
He added: “Insurers across the ASEAN region support the decarbonization of our economies, set themselves targets to contribute to lower or even to “zero-carbon” emissions and to better understand, manage and stress-test our exposure towards climate risks – a trend strongly encouraged by regulators. The basis for this development is the Environmental, Social and Governance framework (ESG) which turned into a governance standard by which insurers measure and report their impact on climate risk, but also demonstrate social responsibility and transparent business practices.”
The economies of the ASEAN region, said Malaysian Re, have fallen short in supporting the targets of the Paris Agreement because of institutional barriers and weak financing.
But, it added, the region has experienced a steady increase in losses resulting from climate change. Most ASEAN insurers already have taken strategic steps to incorporate the Paris accord or ESG into their operations. However, it said that a general taxonomy how to classify assets and liability according to a clear ranking is still being developed in most markets. This, said Malaysian Re, applies both to their investment and underwriting strategies.
The firm wrote: “On the asset side, insurers aim to phase out of thermal coal, thermal power plant or coal cargo – and to increase renewable energy. However, the challenges in building up a climate resilient or ESG compliant investment portfolio still outweigh the opportunities. Insurers see themselves at the forefront of the energy transformation, funnelling investments towards renewable energy projects, such as hydro, wind or solar energy, or to innovative technologies that enable a less carbon intensive economic model.”
It added: “On the liability side, most insurers see exclusions as the most advanced measure to decarbonize their underwriting portfolio. The most widespread exclusions are coal fired power plants, coal mining, arctic drilling or animal testing. Since the ASEAN countries are largely fossil fuel exporters, insurers will not pull out of established contracts or withdraw capacity from existing clients. But they might have set themselves strict targets to reduce their fossil fuel portfolio to a minimum.”
There are a number of ways forwards, said Malaysian Re. It posited that ASEAN insurers expect growing demand arising from the emergence of ‘green’ technologies.
It wrote: “Insurance products may cover renewable energy products, their manufacturing, derivatives, green energy pools as well as mass products like electric cars. Insurers develop credit products to guarantee loans issued for renewable energy investments. In many markets, property policies must be refined or developed to cover hydro, solar or wind energy risks. Insurers also introduce weather derivatives for renewable energy if the envisioned wind or solar production falls short of expectations.”
The regulators, Malaysian Re went on, are also a key driver, if not the main force in promoting and encouraging the integration of ESG or decarbonisation targets into operations and reporting.
It added: “Malaysia and Singapore seem most advanced, having introduced principle-based taxonomies or guidelines on environmental risk management, expecting the country’s insurers to monitor and stress-test their exposure to climate risks. Other insurance commissions expect disclosure on climate risk, made regulatory sustainability reports a standard and asked to fill in questionnaires to gain transparency on the risks of their insurers.”