AM Best has released a report which explores the possible implications that US re/insurers may face after rejoining the Paris Agreement.
Outside the US, in Europe and Asia, re/insurers have increased their integration of ESG factors into their investment and underwriting activities.
However after Presidents Trump’s administration, it is clear that the US has lagged behind their global counterparts on the matter, AM Best says.
The rating agency believes that the Biden administration will have an increased emphasis on climate risk in order to prompt US re/insurers to accelerate their ESG efforts.
There has been an increase in demand for disclosure on climate-related risk in recent years as the investors, regulators, and lawmakers have acknowledged that these risks can be financially material and a potential threat to financial stability.
AM Best’s recent ESG survey of European and Asia-pacific (APAC) re/insurers noted that regulators were seen as a source of high or significant stakeholder pressure for considering ESG risks and opportunities.
With Democrats in the White House and Congress, they are in a stronger position to push through their environmental agenda through executive action and new legislation.
In turn, US re/insurers may gradually notice an increase of scrutiny on how and what they consider and disclose on climate-related risks, perhaps becoming more in line of what’s observed for their European peers.
For several years, large European insurers have had to publish annual reports on the social and environmental impact of their activities. The amount of regulators implementing climate stress tests for banks and insurers, including the United Kingdom, France and Australia has had a dramatic increase.
As the SEC considers developing regulatory standards around how re/insurers integrate ESG factors in their operations, they may feel the presser to look and mirror their international counterparts.
There are also concerns about the industries exposure to climate risk, as well as a reputational one, as they are likely to persuade a number of US re/insurers to consider ESG factors int heir investing and underwriting activities, especially since the Biden administration encourages the development of sustainability regulations and projects.
AM Best’s ESG survey of insurers in Europe and Asia Pacific revealed a majority of re/insurers consider that failure to act on stakeholder pressure around ESG issues could lead to long-term reputation challenges.
AM Best also noted the implementation of more strict climate targets at a federal level is very likely to have an impact on high emitting sectors, like the coal industry.
This could result in an increase of environmental regulation, along with the implementation of incentives, in a bid to accelerate the transition from a high to a low-carbon economy.
AM Best also noted that the efforts needed to support the transition and meet the US climate targets under the Paris agreement should result in an increase in the green infrastructure, including wind pars and levees/floodgates to improve flooding resilience.
Some of these new technologies may require re/insurers to completely redesign their product offerings in order to take into account the new risks that might pose.
These projects represent significant opportunities for re/insurers that can embrace the shift and tailor their products accordingly.