The potential and unknown impacts of climate change, social pressures and governance issues can all have an impact on insurers and reinsurers, resulting in an increased focus on environmental, social, and governance (ESG) risks amongst regulators, investors and clients, reports Moody’s.
The financial services ratings agency warns that ESG risks can influence an insurers ability to meet its financial obligations. And with increasing exposure to ESG risks across the risk transfer space, Moody’s highlights that ESG risks have the potential to affect an insurer’s credit strength.
“ESG risks have become more significant for insurers in recent years due to evolving regulations and policy measures, climate change and shifting demographics.
“Climate change in particular gives rise to greater uncertainty for insurers, both with respect to expectations for frequency and severity of natural catastrophes, and exposure to carbon transition risk through their investment portfolios and the possibility of stranded assets,” explains Brandan Holmes, VP, Senior Credit Officer, Moody’s.
A number of insurers and reinsurers have now integrated ESG criteria into their investment strategies and also underwriting units, highlighted by the ongoing pull-back from the coal industry and the potential for reduced long-term volatility as a result of ESG implementation.
Most recently, global re/insurer Chubb became the latest to adopt a climate policy that aims to phase out its exposure to coal-related underwriting and investment.
Moody’s notes that insurance companies are at the forefront of the transition towards more sustainable finance as they control a large section of global investible assets, while simultaneously providing risk transfer solutions that are vital to the successful functioning of both commerce and society.
In terms of its ratings, Moody’s says that they reflect ESG risks by taking qualitative and quantitative ESG factors into account, considering them within its overall analysis of credit drivers. According to Moody’s, non-life insurers and reinsurers are more exposed to environmental risk, while life players are more exposed to social risks.
