Analysts at Moody’s have argued that the adoption of environmental, social and governance (ESG) initiatives among Japanese property and casualty (P&C) re/insurers is a long-term positive, but that legacy assets and practices will create short-term hurdles.
According to Moody’s the key environmental risk exposure for Japanese P&C re/insurers does not come from the country’s high vulnerability to natural catastrophes, but rather from their own legacy practices.
These undermine flexibility in managing evolving trends, analysts claimed, meaning the benefits of ESG considerations may take some time to arise.
“On the one hand, we are seeing a strong ability to manage climate change risk, with the three major insurance groups having installed risk management subsidiaries that have extensive expertise in catastrophe risks which allows them to adequately manage the tail end of such risks by reinsurance arrangements and geographic diversification,” said Soichiro Makimoto, a Moody’s Vice President and Senior Analyst.
“But many insurers are constrained by the industry’s business culture and social norms that inhibit their flexibility to, for instance, reduce their potential stranded assets or change pricing system and product design of fire insurance as ESG trends evolve,” Makimoto added.
As an example, Moody’s pointed to re/insurers’ large equity investment holdings in Japanese auto manufacturers.
This investments are held despite the environmental risk facing that sector, and their loss-making fire lines due to social pressure to keep fire insurance universally affordable nationwide, which is a form of social risk.
All three major Japanese P&C insurers recently announced plans for a more comprehensive incorporation of ESG factors in their underwriting process.
Over time, Moody’s believes this will reduce their exposure to potential increases in claims and reputation risk from rising ESG-related regulatory and legal challenges.
However, tangible benefits will not fully emerge until more insurers overcome legacy practices to broadly apply ESG considerations in all lines of business, the firm maintained.
Finally, Moody’s noted that a stronger ESG focus could bring opportunities for sustainable premium generation in insurers’ domestic business, as they offer new coverages and services to address emerging social issues and improve their product mix.
This, in turn, could help to address some fundamental growth gaps in the industry due to a shrinking population.
