In light of the current absence of any global guidance on how to integrate environmental, social and governance (ESG) criteria into business models, a number of major participants in the re/insurance industry have taken a “leading role” on these issues, according to A.M. Best.
Re/insurers are uniquely positioned to tackle the ESG agenda given their role as risk managers, institutional investors and risk carriers on behalf of a wide range of industries, A.M. Best said.
They also face critical risks and opportunities associated with climate-change trends and challenges to close the protection gap, and are well aware of their shareholders’ expectations to try to align both their long-term investment and underwriting strategies accordingly.
Environmental factors are considered a severe threat to the balance sheet of property and casualty (P&C) re/insurers in particular, due to the potentially significant, rapid and unexpected impact of such losses.
While A.M. Best does not explicitly consider ESG criteria in its ratings, it expects re/insurers accepting catastrophe risk to be able to demonstrate that they can effectively manage the potential impact of climate change on the frequency and severity of natural catastrophe events.
With no global guidance on how to integrate ESG risks into the underwriting process, the re/insurance industry has developed various approaches to tackling these issues.
These include the implementation of exclusion criteria in underwriting lines for eliminating certain ‘toxic risks,’ such as weapons, coal-based energy production, and tar sands, as well as the use of risk selection, geocoding and other metrics in the underwriting process to avoid areas subject to higher climate-related loss severity.
A.M. Best noted that these kinds of changes in the insurance portfolio mix may have a material impact on prospective underwriting margins, trends and volatility.
Additionally, the rating agency said that companies need to determine whether sustained enhancements have been made to the composition of investment portfolios that ultimately translate into prolonged improvements in the performance of assets.
ESG topics are becoming increasingly important for re/insurers as well as the financial community and the public in general, and raising further public awareness will be key to putting pressure on companies to better consider the potential impact of ESG factors, A.M. Best said.
This will be reinforced by regulatory issues with an increased focus on ESG issues, such as the inclusion of climate-related non-financial disclosures to facilitate informed decisions.
A.M. Best said that it would continue to monitor ESG and other emerging risks as part of its ongoing credit analysis of the re/insurance industry, and would provide additional transparency to its criteria as it specifically relates to ESG, if needed.
