19 July 2021

CRE: 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....

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