Analysts at Moody’s Investors Service have reported that Chinese insurers’ rising exposure to climate-related disasters and decarbonisation policies will negatively impact earnings and capitalisation if not managed properly.
The report noted that environmental risks are also becoming an increasingly important credit driver for Chinese insurers as their exposure to climate-related catastrophic events and decarbonisation policies grow.
P&C insurers are also under a policy push to underwrite risks against environmental issues in non-motor lines, such as agricultural insurance.
Insurers have weak pricing autonomy in such businesses because of the social functions they serve, limiting insurers’ ability to manage underwriting risks via timely repricing, although Moody’s expects policy support by way of premium subsidies will help support the profitability of these lines.
Meanwhile, faster carbon transition to meet China’s climate goals raises impairment risks for life and P&C insurers’ investments in carbon-intensive industries, despite the relatively modest direct bond and equity investments that most rated insurers have in these sectors.
But the policy directive to grow carbon-friendly businesses will spur insurers’ investments in renewable energy and related infrastructure. The analysts predict that green investments made fully in line with government policy will entail lower credit risks because of government support.
A few major Chinese insurers are adopting global best practices for environmental risk management in their business strategies and operations, however much of the industry still lags their global peers on this.
Under these circumstances, individual insurers’ efforts to manage environmental risks, such as stronger engagement with policyholders on loss prevention and incorporating global best practices on responsible investing and disclosures, will help mitigate negative pressure on their credit profile.
Kelvin Kwok, a Moody’s Analyst commented: “Rising economic losses from climate-driven natural disasters are making Chinese property and casualty (P&C) insurers’ earnings and capitalisation more volatile as they fill growing demand for insurance protection.
“Such losses tend to be unpredictable and prone to mispricing risks because of climate change. Insurers’ lower catastrophe reinsurance coverage compared with global peers could exacerbate the potential capital strain.”