In a recent report released by KBRA on climate change, analysts have stated that while much of the insurance industry has taken “concrete steps” to address the issue on the asset side of the balance sheet, incorporating sustainability into underwriting is a complex endeavour that requires time and a differentiated approach.
KBRA believes that insurers can meaningfully influence a positive outcome through better management of environmental, social and governance (ESG) risks, thereby strengthening the industry’s contribution to financing a more resilient, sustainable world.
Moreover, analysts note in the report that they acknowledge that many insurance companies believe they have addressed climate change in their investment portfolios by defensively divesting their holdings in so-called dirty industries.
Analysts added that while this may protect companies from reputational risks and the potential for stranded assets, it does not address how communities will finance the transition to a low carbon future.
The report reads: “Dirty industries as well as low-carbon transition technologies and alternative energy sources need massive amounts of funding for the world to achieve net zero emissions. With approximately $36 trillion of assets under management in 2020, KBRA notes that the insurance industry is well positioned to take advantage of strategic, targeted debt and equity investments that promote sustainability.”
Analysts also highlighted that on the liability side of insurer balance sheets, product line and customer considerations will necessitate that insurers take a more nuanced risk-based approach to reflect the interplay between different stakeholders and desired outcomes.
Furthermore, analysts note that extreme weather and climate action failure are among the top five short-term risks to the world, according to the Global Risks Report 2022, with both risks and biodiversity loss also ranking as the top three most potentially severe risks for the next decade too.
Analysts also address within the report, that while much has been done to support achieving the goals of the Paris Agreement on the asset side of insurers’ balance sheets, similar progress on the liability side has been more elusive.
In addition, some insurance entities have established lead times to exit from specific risk, which analysts stated has led to criticism from some climate change stakeholders, while other insurers have also established escalation processes for exceptions to the more general guidelines that prohibit the writing of certain types of risk.
The report finalizes by stating that in addition to potential negative financial impacts on insurers, wholesale and immediate abandonment of classes of business could have negative social implications by stranding segments of the population with no access to alternative means of risk transfer.
“Insurers need to carefully balance the need to transition their businesses to net zero while remaining mindful of their pivotal role to support sustainable economic and social development for communities across the globe.”
