The new sustainable finance plans proposed by the European Commission (EC) will stimulate investment, help to manage sustainability-related financial risks, and foster transparency and long-term decision making in financial and economic activity for re/insurers in the European Union (EU), says ratings agency Moody’s.
Moody’s notes that the EC outlines three main ways to support re/insurers’ existing focus on sustainable finance, which has been adopted in response to the indisputable impact of climate change on natural catastrophe exposures.
Firstly, the EC proposes removing barriers to investment in key areas like infrastructure and the energy sector, which will encourage re/insurers to finance sustainable infrastructure projects.
This will be of particular interest to life re/insurers due to the lengthy durations of both infrastructure assets and their insurance liabilities, although insurers more generally will benefit from the illiquidity premium in infrastructure asset yields.
However, although Moody’s recognises that increasing the supply of high quality infrastructure investments will support insurers’ profitability, it also observes that such assets only account for a small portion of overall portfolios – a condition it attributes to a lack of existing quality infrastructure investments, as well as their onerous regulatory capital treatments.
Secondly, the EC intends to reflect climate change considerations in insurers’ regulatory capital requirements, which will likely pressure companies into reducing their underwriting exposure to sectors that contribute to climate change, or to divest from them altogether.
Moody’s has expressed support for these proposals from a credit perspective, although it notes that property and casualty (P&C) re/insurers already assess the impact of climate change on their natural catastrophe-related liabilities.
Finally, the EC outlines plans to integrate sustainability considerations into the suitability assessment of insurance and savings products offered to customers.
Moody’s suggests that such a change will be viewed more favourably as customers become more concerned with sustainability issues, even though it will increase the potential for higher costs and the risk of regulatory non-compliance from insurers.
Although the legislative proposals under discussion carry a wide range of implications for re/insurers in the EU, Moody’s expects that the overall credit impact and the material changes to companies’ regulations and operating environments are unlikely to be felt for some time, pending further consultation for plans in 2018 and 2019.
