In recent years, investors and shareholders have been increasingly judging re/insurers on their incorporation of a range of Environmental, Social and Governance (ESG) factors, but consideration of these risks and opportunities could also result in significant financial benefits, according to a recent report by A.M. Best.
The report observed that, while there is currently no global guidance for ESG risk integration, the importance of ESG factors has already been recognised in many sectors of the re/insurance industry, such as in property & casualty (P&C), where companies are significantly more exposed to climate related hazards.
Re/insurers have often mitigated climate change risks by adjusting the prices of their cover, although A.M. Best warned that this practice needs to be balanced so as not to conflict with closing the insurance gap, another key ESG objective.
Similarly, many re/insurers implement exclusion criteria in their underwriting lines to eliminate certain toxic risks, such as controversial weapons, coal-based energy production and extraction, and tar sands.
In terms of ESG opportunities, many reinsurers are developing new products that incorporate social and environmental values, such as solutions that promote a healthy lifestyle within life and health sectors, or that promote renewable energy in the P&C sector.
Besides being ethically commendable, A.M. Best suggested that avoiding ESG integration could entail a number of adverse risks for re/insurers, such as elevated reputational and litigation risk, which may lead to customer dissatisfaction and loss of business.
Litigation risk is also being increasingly amplified by social media, and can later turn into contingent liabilities or realised provisions which could impact balance sheet strength.
Additionally, A.M. Best noted that a company that does not consider ESG factors in its operations may be less attractive to investors when compared with one that is included in sustainability indexes, thereby potentially limiting its financial flexibility.
The report concluded that this shift toward ESG management is unlikely to fade in the foreseeable future, and A.M. Best added that it would continue to monitor the impact of this trend on re/insurers’ credit ratings.
