ESG to impact coverage, price and future renewals

Environmental, social and governance (ESG) disclosure and commitments on net-zero emissions by insurers are increasingly likely to affect the coverage available and its price for some corporates, on top of requiring buyers to disclose more information at future renewals. 

ESG considerations, and climate change in particular, are already affecting insurers’ risk appetite for carbon-intensive risks like thermal coal. Under pressure from stakeholders and their own net-zero commitments, a growing number of insurers are shying away from new fossil fuel projects and have stated their intention to gradually withdraw from insuring coal, oil and gas in coming decades. 

The information provided on ESG by buyers at renewal could affect the price and availability of insurance, with underwriters potentially refusing to cover risks that do not meet related underwriting criteria. Insurers will need to develop ESG underwriting criteria that balance their net-zero commitments with the needs of customers, who are likely to transition to more sustainable business models at different paces and to varying degrees. 

ESG is approaching a tipping point in the insurance industry, as insurers move from voluntary disclose to mandatory requirements. A growing number of countries, notably those in the European Union, Australia and New Zealand, are requiring ESG disclosure from insurers and reinsurers. At the same time, ratings agencies and regulators are increasing their focus on climate change and ESG risk. Insurers in France and the UK were recently subjected to climate change risk scenario testing for the first time.

In addition to regulatory requirements around disclosure, insurers and brokers are also under pressure from stakeholders – including investors, customers and environmental groups – to align investments and underwriting with the UN Paris Agreement’s target to limit global warming to below 2°C and pursue efforts to limit it to 1.5°C.

During the past year, many of the world’s largest insurers – including Lloyd’s, AIG and Tokio Marine – have come under intense pressure from protesters to stop underwriting fossil fuel projects and pipelines in Australia, North America, Africa and the Caribbean. 

But a growing number of insurers and brokers have pledged to achieve net-zero emissions in the coming decades, or have at least committed to reduce the carbon intensity of their investments and underwriting. More than 20 insurers have joined the UN Net-Zero Asset Owner Alliance, which will see some $6.6trn of assets aligned with net-zero emissions by 2050, while seven leading insurers and reinsurers are establishing a Net-Zero Insurance Alliance to provide industry leadership on underwriting. 

Pressure is mounting on insurers to tackle ESG risks, according to Insurance Europe. “Sustainability, in particular, is increasingly becoming the focus of policymakers at EU and national level, and expectations on European insurers, which can play a role in several ways, are therefore increasing,” a spokesperson for the trade body told Commercial Risk Europe. These new rules will have an impact on insurers’ role as investors and risk underwriters, the spokesperson said.

Many insurers have started to screen their investments through ESG criteria and increase their sustainable investment commitments, the spokesperson explained. According to Insurance Europe estimates, the European insurance industry plans to allocate more than Ä140bn to sustainable investments by 2022. At the same time, European insurers are subject to a wide range of EU regulatory demands, including the Taxonomy Regulation and the Sustainable Finance Disclosures Regulation, the spokesperson noted.

And insurers’ underwriting policies will have an impact on customers, depending on their sector of activity or risk profile, the trade body said. For example, insurers may decide not to underwrite risks related to the extraction of certain types of fossil fuels, such as tar sands and coal, according to the Insurance Europe spokesperson.

“[Insurance] companies following this approach tend to have in common a decision not to insure new projects involving certain types of fossil fuel. By taking such an approach, these companies incentivise the transition towards cleaner sources of energy, while continuing to protect against the risks of existing activities. Such decisions and how they are implemented in practice are the exclusive responsibility of each individual company,” they said.

As more and more insurers report on ESG factors, they will be looking for additional data and knowledge on risks, according to Marguerite Soeteman-Reijnen, chairman and global board member at Aon in the Netherlands. “As an insurance buyer, if you want to be appropriately covered or mitigate your risks, you need to be aware of this so you can anticipate what data is relevant to the insurers community. This might affect also a better price,” she said.

“Climate change can affect access to affordable insurance, but it also presents an opportunity for insurers to invest in companies and technologies that will help tackle the issue – and the insurers that do so will have an advantage,” she added. 

According to Ms Soeteman-Reijnen, corporate insurance buyers and risk managers should start to prepare for changes brought about by ESG and climate change requirements on insurers. “This should be on the boardroom and risk managers’ agenda of all corporates across the globe. If risk managers and insurance buyers are not yet thinking of it, they should start immediately in order to remain relevant and make sure they have the relevant risk assessment and covers in place,” she said.

“Addressing climate change and the risks attached to it is key. It is a very complex stakeholder community – that includes shareholders, regulators and consumers – who do not all have the same agenda. The most important thing is for an insurance buyer to understand what different stakeholders may require over the next year, the next three years, the next ten years, and start gathering the relevant data and insights,” Ms Soeteman-Reijnen said.

According to Ferma, insurers may ask for further sustainability risk information from insurance buyers for underwriting purposes. However, buyers should be able to use the results of their ESG integrated sustainability risk assessment – which forms part of their ERM framework – as the basis for communication with insurers, it added.  

The risk management federation has also expressed a desire for greater data sharing with the insurance market. “More dialogue over sustainability risks should create a better conversation between insurance buyers and the market, especially if there are specific, sustainability-related risks where capacity becomes limited,” a spokesperson for Ferma told CRE. 

“If European insurers remove capacity for certain business activities, companies may look to alternative methods of risk transfer such as increased use of captives, mutual insurers or pools, and possibly securitisation of risk through capital market instruments,” the spokesperson added.

ESG factors are already influencing some of the risks insurers are willing to assume, such as thermal coal, palm oil and more generally in the extractive industries, according to Swiss Re. 

“Some (re)insurers are no longer offering covers to certain companies with low ESG performance, or excluding coverage for an entire sector. At Swiss Re, we prefer to set long-term targets to exclude certain risks such as thermal coal – 2030 for OECD countries and 2040 for the rest of the world – and use the time until then to work with our clients and partners on their transition journey to clean energy options,” said Stefanie Ott, head of qualitative risk management at Swiss Re.

“We see an increasing number of insurers that are interested in considering ESG factors for their underwriting. For commercial clients of insurers, this trend may add to the existing investor and stakeholder pressure on ESG. Particularly, privately held commercial clients may be facing new requests for ESG data from their insurers. The data collection may vary across industries and lines of business but may be aligned with established reporting frameworks,” she said.

ESG underwriting disclosures are more challenging than investments, according to Ms Ott. “Disclosure of quantitative ESG-related information from underwriting remains a challenge for insurers, mainly due to a lack of metrics, standards and data that would allow for consistent measurement, reporting and steering of ESG factors in underwriting,” she said. 

The insurance industry therefore needs to establish common metrics on how to measure ESG underwriting impacts for a range of sustainability issues, explained Ms Ott. One such metric is the recently developed Weighted Average Carbon Intensity for insurance portfolios, which the Task Force on Climate-related Financial Disclosures now recommends for application in underwriting.

However, ESG data is often lacking for non-listed companies, which so far have little incentive to report on ESG and make up the majority of most commercial insurance portfolios, according to Ms Ott. “[But] In the absence of insured-specific data, insurers may use industry, country and line of business information as proxies for the assessment of ESG performance of their underwriting,” she said.

There is a gradual increase among larger insurers to request ESG-related information from partners to ensure principles are aligned, or companies have a plan to achieve certain targets, said Mahesh Mistry, senior director at ratings agency AM Best. 

“While some larger market participants are allowing time for transition, there have been cases recently where stewardship management has resulted in (re)insurers reducing investment in certain sectors… due to insufficient commitment on climate objectives. Similarly, there have been a number of (re)insurers, particularly in Europe, that have distanced themselves from insuring new coal projects,” he said.

Initially, insurers approached ESG and climate change by focusing on what they weren’t prepared to write, rather than how they would support the energy transition, according to Amy Barnes, head of sustainability and climate change strategy at Marsh.

But there is “growing widespread recognition” of the need for an orderly transition and shifting the focus to support the transition to a low-carbon economy, he said. “Increasingly, insurers are asking more questions about insureds’ transition commitments. These questions are focused on carbon-intensive industries such as energy and hard-to-abate sectors,” said Ms Barnes.

Marsh expects insurers will require ESG information as a standard part of the underwriting process in due course, she continued. “In supporting the transition, insurers will need to support all types of businesses, but we expect them to be monitoring their portfolio of risks to ensure that ESG performance is improving overall. Risk managers should be making sure they are familiar with their company’s sustainability and climate strategies, and are communicating these to their insurers as part of their renewal conversations,” said Ms Barnes.  

Gabrielle Durisch, head of sustainability, commercial insurance and group underwriting at Zurich Insurance, agreed that corporate customers should expect to have to answer more questions around ESG as part of the renewal process during the next few years.

“As insurers are being asked to provide input on ESG-aligned activities to potential new clients, we expect there will be an increasing need for the insurance industry to request information from customers in order to meet the reporting requirements expected to come,” she said.

Given upcoming regulations and initiatives, it is vital that insurance buyers and risk managers look at ESG now and embed all of these principles into their strategy and operations, said Christopher Bonnet, head of ESG business services at Allianz Global Corporate & Specialty (AGCS).

“We believe that ESG and especially climate change-related risks should be an integral part of firms’ risk management frameworks, with a clear impact assessment of each risk type – for example, credit, insurance, market, etc – depending on the industry. Understanding these risks as they affect individual businesses is the first step. Further, companies are expected to model those risks and consider mitigation measures,” he said.

A dedicated unit acts as a centre of competence for ESG within Allianz’ P&C business and a central contact point for insurance coverages globally, explained Mr Bonnet. As part of the ESG referral process, the team ensures all potentially ESG-critical business transactions are screened and assessed in detail to allow “informed decision-making and potential engagement” with policyholders, he said.

“Within AGCS, the underwriting teams, and by extension clients, already feel the impact of ESG-driven processes. More and more, (re)insurers advance integrating ESG and climate considerations into their core business, adding to the expectation on clients to transition to a low-carbon business model while also mitigating and managing the broader set of ESG risks,” he added.

According to Ms Durisch, the impact of ESG on particular risk profiles is a key discussion point between Zurich and its corporate customers. “Many of them have sustainability teams who are joining our discussions and for those that don’t, we are bringing our experience and insights to them so we can all move forward together on addressing ESG issues and opportunities,” she said.

“As underwriters, we are working closely with our colleagues in investment management to ensure an aligned approach to both the companies we underwrite and the companies we invest in. The first step is to understand how to calculate the emissions associated with the underwriting portfolio. As part of the Net Zero Insurance Alliance, we are working together with peers to understand how methodology could be developed to enable this,” added Ms Durisch.

“Once we have a widely accepted methodology, analysis needs to be done on the transition pathways of the underwriting book and how we should expect the carbon emissions to develop in line with our path to a 1.5°C future. The final step is to translate that into realistic, actionable steps and work with our customers to facilitate the transition,” she continued.

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