In force since Feb. 19, 2021, the United States’re-entry in the Paris Accord signals Washington’s commitment to addressing climate risk, an analysis by AM Best says. This green shift will affect U.S. insurers and reinsurers, the financial rating agency says.
AM Best expects this shift to push U.S. (re)insurers to accelerate the adoption of ESG factors. The United States is perceived to be lagging behind Europe, and especially Asia, in this area, AM Best continues.
Reputational risk
A growing number of insurers and reinsurers in these regions are adopting ESG in their investment and risk underwriting activities, the agency points out. Pressure from regulators has a lot to do with it, the agency’s recent ESG survey found. “Regulatory requirements have pushed (re)insurers to improve their understanding of all the potential risks facing their organisation, which should contribute to strengthening the sustainability of the insurance industry over the longer-term,” AM Best explains.
Exposure to climate-related risks could become a burden for insurers, or even a threat to their reputation, because it is likely to be further scrutinized by American regulators. This could convince many insurers to accelerate their adoption of ESG factors, AM Best says. “Demand for increased disclosure on climate-related risks has been growing in recent years as investors, regulators, and lawmakers have acknowledged that these risks can be financially material and a potential threat to financial stability.”
Model to follow
Now that the Democrats control the White House and Congress, they are in a stronger position to advance their environmental agenda, AM Best adds. Pressure on publicly traded insurers and reinsurers will escalate. “US (re)insurers, particularly those that are publically listed and fall under the oversight of the Securities Exchange Commission (SEC), may gradually notice increased scrutiny on how they consider and what they disclose on climate-related risks,” the commentary says.
The agency reports an uptick in the global number of regulators requiring insurers to perform climate stress tests, particularly in the UK, France and Australia. “As the
SEC considers developing regulatory standards around how (re)insurers integrate ESG factors in their operations, they may be inclined to look to international counterparts for inspiration.”
Green focus
AM Best anticipates that the U.S. federal government's more stringent climate targets will spur the shift to a low-carbon economy. Sectors such as the coal industry will be impacted. This is one more reason for insurers to incorporate ESG factors into their investment decisions, the agency adds. The challenge: to limit their exposure to stranded assets, that is “those assets that may lose their value unexpectedly or prematurely due to external factors.”
AM Best gives another example from fossil fuels: the Keystone XL project. Through executive action, U.S. President Joe Biden rescinded TC Energy's licence to begin construction of the oil pipeline between Alberta and Nebraska.
Business Opportunities
AM Best also believes that insurance coverage for so-called "toxic" industries can draw unwanted attention from regulators and bring garner publicity that could damage (re)insurers’ reputation.
This new environment may also create other opportunities for insurers, AM Best adds. If, for example, coal suppliers cannot insure themselves due to lack of capacity in the international market, captive insurers will become a fertile breeding ground. A captive insurance company is an insurer created by one or more companies to provide insurance for themselves.
Going green has its advantages, AM Best explains. “Green infrastructure projects which support the transition from a high to low-carbon economy should present (re)insurers with new underwriting opportunities.”
