The AM Best Company Inc. released new research Nov. 16 which shows that insurers and reinsurers believe the industry has a role to play in the environmental, social and governance (ESG) arena, and that understanding ESG factors is crucial to the industry’s long-term viability.
The survey of insurers and reinsurers in Europe and the Asia Pacific region found that risk carriers are at different stages of their ESG journey and there is a marked lag between the recognition of ESG risks and action being taken to mitigate those risks. Larger insurers and reinsurers with an international focus were typically more engaged and more active in the ESG arena compared to their smaller peers. The survey also found that investment activities are the primary focus of ESG integration, without only a few respondents saying they’ve incorporated ESG considerations in their underwriting initiatives.
Corporate governance and product liability
AM Best says it expects the level of insurance industry involvement with ESG to continue to grow as regulators, rating agencies, investors and other stakeholders continue to refine and evolve ESG definitions and approaches. It says insurers identified corporate governance and product liability, including cyber security and climate risk as the most relevant ESG issues affecting their business.
“Product liability including cyber security was cited by 76 per cent of respondents as a factor that was of high or significant relevance for the insurance industry,” they write. “Some insurers possess huge amounts of personally identifiable information from their clients, which makes cyber security and data privacy a key social issue that need to be managed from an operational risk management perspective.”
Climate risk was also considered a significant or highly relevant ESG issue by 76 per cent of respondents. Although 77 per cent said proper understanding and integration of ESG factors was increasingly critical, only a little over half of respondents said their company was actively engaged on ESG matters. (Of all respondents, however, they note that all of the largest respondents said they were actively engaged.)
Reputational challenges
“In general, respondents acknowledged that failure to act on stakeholder pressure around ESG issues could lead to long-term reputational challenges for their organization and the insurance industry at large,” they write. “Larger respondents were more likely to make the link between failure to act and the longer term reputational consequences. Reducing reputational risk was the most-cited reason behind integrating ESG factors in investing mandates by survey respondents.” AM Best adds that preservation of investment value and regulatory requirements were also high on the list of rationales.
The report says the negative screening, where companies or sectors are excluded from an investment portfolio, was the most popular approach to integrating ESG in investment strategies. In underwriting, over a third felt that ESG factors were only moderately important to consider. Only 14 per cent felt it was extremely important to consider ESG factors in underwriting. Nearly 10 per cent said it was not important for insurers to integrate ESG in their underwriting efforts.
