ESG in Reinsurance Underwriting
ESG policies are playing an increasingly important role in reinsurance underwriting. This article offers a snapshot of the current environmental & social (E & S) underwriting considerations common in place and ESG opportunities being explored by reinsurers. We also discuss the complexity of ESG issues amidst an evolving market landscape and the ongoing progress on regulations that could impact the re/insurance industry’s sustainability drive.
ESG (Environmental, Social and Governance) risks are core to global re/insurance industry’s risk underwriting service to society. While on the one hand, the industry has a responsibility to provide financial protection to individuals, corporations, and societies against many ESG risks (such as nat cat, accidents, and health risks, D&O risks, to name but a few), on the other, its own business is impacted directly by ESG factors such as climate change.
Moreover, the industry is accountable to the broader expectations of investors, regulators, and other stakeholders on ESG policies and disclosures.
In this short article, we explore how the reinsurance industry is responding to these changes and expectations, specifically, the impact of ESG factors on the industry’s underwriting appetite and approaches.
To a large extent, the reinsurers’ ESG underwriting strategy involved screening and exclusion of high ESG risk companies (and assets) from their direct and facultative portfolios. Data accessibility issues within treaty portfolios make such a commitment to treaties difficult (see Figure 2).
A few reinsurers also had an engagement policy to support ‘Just Transition’ in emerging and frontier markets, where a time-bound and targets-based stewardship plan may be put in place for companies or projects with high ESG risks.
• Thermal coal is a target for most reinsurers. Eight out of nine reinsurers we surveyed have underwriting restrictions on new thermal coal businesses, with five providing a timeline for a full phase-out of thermal coal mining and power business by (or before) 2040 (see Figure 4).
• In some cases, exceptions are made for coal companies that are Paris Agreement aligned, have a credible transition plan, or have projects in countries with low electrification rates.
• Oil Sands, Arctic Drilling, and Oil & Gas are other activities with varying degrees of underwriting restrictions on new or renewal business (see Figure 3).
• Restricted topics generally included controversial weapons and tobacco (see Figure 5) and monitoring of industries that are considered at high risk of human rights violations (such as mining).
• The social-related targets and KPIs were often set around diversity and inclusion topics, such as gender equality, gender pay gap, and regional diversity.
• Most reinsurers gauged their social impact and outcomes in terms of impacts and contributions to the achievement of UN Sustainable Development Goals (SDG Goals). Examples include SDG 3: “Good health and well-being” from affordable health and longevity solutions, SGD 2: “Zero hunger” through agriculture reinsurance, and SGD 9: “Industry, innovation and infrastructure” from property underwriting (see Figure 6).
• Among the reinsurers we reviewed, six out of nine actively look at risk solutions in renewable energy.
• A few also extend support to new, green technologies, such as hydrogen, nature-based solutions, and sustainable transport (see Figure 7).
• Other environment-friendly innovations of interest include carbon offset insurance[2].
However, the lack of loss-history and limited data on risk exposure for these new technologies can make underwriting complicated and expensive.
• The European Insurance and Occupational Pensions Authority (EIOPA) published technical advice on the integration of sustainability risks in the delegated acts under Solvency II and the Insurance Distribution Directive (IDD)[3] in April 2019.
• The Bank of England ran a climate scenario exercise for the largest banks and insurers in 2021 to assess the soundness of the financial system from physical and transition shocks.[4]
• The US Securities and Exchange Commission (SEC) has proposed rules to enhance and standardise climate-related disclosures in March 2022[5].
• The Monetary Authority of Singapore conducted a climate scenario exercise for selected key insurers and banks, where findings showed potential for significant balance sheet impact for insurers (on both assets and liabilities).
Other regulators are following similar paths on stress and scenario tests, with considerations for the inclusion of these scenarios in re/insurers’ Own Risk and Solvency Assessment (ORSA) reports.
Moreover, the UK Financial Conduct Authority (FCA) and the European Supervisory Authorities[6] are both in the process of studying and integrating greenwashing risks as part of their supervisory tools.[7][8]
ESG ratings/scorecards/rankings by different agencies also vary significantly in their methodologies. To compare a few examples, MSCI provides a relative industry rating to each company on a 7-point scale (from AAA to CCC); while Sustainalytics classifies companies in 5 buckets (between 0 to >40) based on their ESG risk exposure and risk management. S&P and Refinitiv provide an ESG score between 0-100, but the data sources and the weights assigned to different ESG topics differ for the two agencies. An analysis from MIT Sloan showed that the average correlation between five prominent rating agencies’ ESG ratings was 0.61 (compared to a 0.99 correlation for Moody’s versus S&P credit ratings), noting divergences in the scope, weights, and measurement of data for ESG ratings.[10]
Policymakers are taking meaningful steps to set common ESG regulatory standards and are developing standardised taxonomies for what qualifies as a sustainable activity. But given the current divergences, re/insurers would need to take the initiative to present their own views on which frameworks are best aligned with their ESG ambitions and principles. The re/insurer’s own view of a project’s E&S credentials becomes important as well.
This is especially true in situations where an action that advances some ESG goals may undermine other sustainability objectives. For example, hydropower projects have the potential to provide inexpensive renewable energy and are an important component of the clean energy transition, but new dams can also damage the surrounding ecology and biodiversity and displace local populations. Policies, ESG frameworks and ratings agencies’ criteria on such topics may also differ.
When dealing with such complex ESG issues, not only does the re/insurer need a thorough understanding of the measurable and non-measurable impacts of the projects on the environment and society, but also the ESG goals that the re/insurer is trying to achieve.
[1] From reinsurers’ ESG strategy documents, latest sustainability reports and website information as of May 2023.
[2] AXA XL: Enabling the offset; what role can insurance play in offsetting emissions, November 2022
[3] EIOPA: Technical advice on the integration of sustainability risks and factors in Solvency II and the Insurance Distribution Directive , April 2019
[4] Bank of England: Results of the 2021 Climate Biennial Exploratory Scenario (CBES), May 2022
[5] SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, March 2022
[6] The European Supervisory Authorities are the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA).
[7] FCA pushes back publication of new anti-greenwashing rules, 29 March 2023, Pensions & Investments
[8] European regulators launch greenwashing study, 15 November 2022, ESG Today
[9] TCFD stands for Taskforce on Climate-related Financial Disclosure and TNFD stands for Taskforce on Nature-related Financial Disclosure.
[10] MIT Management Sloan School: Why ESG Ratings vary so widely (and what you can do about it), August 26, 2019
ESG (Environmental, Social and Governance) risks are core to global re/insurance industry’s risk underwriting service to society. While on the one hand, the industry has a responsibility to provide financial protection to individuals, corporations, and societies against many ESG risks (such as nat cat, accidents, and health risks, D&O risks, to name but a few), on the other, its own business is impacted directly by ESG factors such as climate change.
Moreover, the industry is accountable to the broader expectations of investors, regulators, and other stakeholders on ESG policies and disclosures.
In this short article, we explore how the reinsurance industry is responding to these changes and expectations, specifically, the impact of ESG factors on the industry’s underwriting appetite and approaches.
A Snapshot of ESG in Reinsurance Underwriting
We conducted a benchmarking exercise of six major European reinsurers and three North American reinsurers regarding their ESG underwriting policies and ambitions.[1] It was found that considerable divergences exist among reinsurers; and between the European and North American reinsurers in terms of their ESG underwriting policies. For example, all six European reinsurers we reviewed had a net zero commitment target by 2050, applicable to operations, underwriting, and investment, as opposed to none of the three North American reinsurers (see Figure 1).To a large extent, the reinsurers’ ESG underwriting strategy involved screening and exclusion of high ESG risk companies (and assets) from their direct and facultative portfolios. Data accessibility issues within treaty portfolios make such a commitment to treaties difficult (see Figure 2).
A few reinsurers also had an engagement policy to support ‘Just Transition’ in emerging and frontier markets, where a time-bound and targets-based stewardship plan may be put in place for companies or projects with high ESG risks.
Figure 1: Number of reinsurers with net zero commitments |
Figure 2: Type of Underwriting business with ESG Restrictions |
*as of May 2023
|
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports |
Environment-related Underwriting Restrictions
A drill-down into the ESG underwriting restrictions adopted by reinsurers showed a few notable trends in terms of environment restrictions:• Thermal coal is a target for most reinsurers. Eight out of nine reinsurers we surveyed have underwriting restrictions on new thermal coal businesses, with five providing a timeline for a full phase-out of thermal coal mining and power business by (or before) 2040 (see Figure 4).
• In some cases, exceptions are made for coal companies that are Paris Agreement aligned, have a credible transition plan, or have projects in countries with low electrification rates.
• Oil Sands, Arctic Drilling, and Oil & Gas are other activities with varying degrees of underwriting restrictions on new or renewal business (see Figure 3).
Figure 3: Underwriting restrictions on new and existing businesses |
Figure 4: Planned date of full phase-out of coal coverage |
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports |
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports |
Social-related Underwriting Restrictions
Unlike the environment-related underwriting restrictions, restrictions based on societal factors are not as coherent across the reinsurers we reviewed.• Restricted topics generally included controversial weapons and tobacco (see Figure 5) and monitoring of industries that are considered at high risk of human rights violations (such as mining).
• The social-related targets and KPIs were often set around diversity and inclusion topics, such as gender equality, gender pay gap, and regional diversity.
• Most reinsurers gauged their social impact and outcomes in terms of impacts and contributions to the achievement of UN Sustainable Development Goals (SDG Goals). Examples include SDG 3: “Good health and well-being” from affordable health and longevity solutions, SGD 2: “Zero hunger” through agriculture reinsurance, and SGD 9: “Industry, innovation and infrastructure” from property underwriting (see Figure 6).
Figure 5: Underwriting restrictions based on social factors |
Figure 6: Examples of reinsurers’ contributions to the SDGs |
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports |
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports |
ESG as a Reinsurance Opportunity
While most of the reinsurers’ ESG policies involve using exclusion lists, a successful clean transition aligned with the Paris Agreement would also need reinsurers to support the scaling of new low-carbon technologies and transition products. This is a potentially huge opportunity for reinsurers going forward.• Among the reinsurers we reviewed, six out of nine actively look at risk solutions in renewable energy.
• A few also extend support to new, green technologies, such as hydrogen, nature-based solutions, and sustainable transport (see Figure 7).
• Other environment-friendly innovations of interest include carbon offset insurance[2].
However, the lack of loss-history and limited data on risk exposure for these new technologies can make underwriting complicated and expensive.
Figure 7: Reinsurers are exploring risk solutions for new ESG technologies and products
Source: Reinsurance broker reports, reinsurance companies’ sustainability reports
Increasing Regulatory Scrutiny
ESG is not completely new to re/insurance. The UNEP Principles of Sustainable Insurance (PSI) have been in place since 2012. However, ESG frameworks and regulations are becoming more robust. Over the past few years, regulators have stepped up measures to assess both the impact of sustainability risks on insurers and the level and sophistication of disclosure.• The European Insurance and Occupational Pensions Authority (EIOPA) published technical advice on the integration of sustainability risks in the delegated acts under Solvency II and the Insurance Distribution Directive (IDD)[3] in April 2019.
• The Bank of England ran a climate scenario exercise for the largest banks and insurers in 2021 to assess the soundness of the financial system from physical and transition shocks.[4]
• The US Securities and Exchange Commission (SEC) has proposed rules to enhance and standardise climate-related disclosures in March 2022[5].
• The Monetary Authority of Singapore conducted a climate scenario exercise for selected key insurers and banks, where findings showed potential for significant balance sheet impact for insurers (on both assets and liabilities).
Other regulators are following similar paths on stress and scenario tests, with considerations for the inclusion of these scenarios in re/insurers’ Own Risk and Solvency Assessment (ORSA) reports.
Moreover, the UK Financial Conduct Authority (FCA) and the European Supervisory Authorities[6] are both in the process of studying and integrating greenwashing risks as part of their supervisory tools.[7][8]
While ESG standards are evolving, ESG principles act as the guiding light
ESG standards are still evolving. There currently exist a number of ESG frameworks that measure different aspects of the impact on and from businesses on the environment and society. For example, ESG frameworks include the UN Global Reporting Initiative (GRI), UN SDGs, SASB accounting standards by the IFRS and the TCFD and TNFD frameworks [9].ESG ratings/scorecards/rankings by different agencies also vary significantly in their methodologies. To compare a few examples, MSCI provides a relative industry rating to each company on a 7-point scale (from AAA to CCC); while Sustainalytics classifies companies in 5 buckets (between 0 to >40) based on their ESG risk exposure and risk management. S&P and Refinitiv provide an ESG score between 0-100, but the data sources and the weights assigned to different ESG topics differ for the two agencies. An analysis from MIT Sloan showed that the average correlation between five prominent rating agencies’ ESG ratings was 0.61 (compared to a 0.99 correlation for Moody’s versus S&P credit ratings), noting divergences in the scope, weights, and measurement of data for ESG ratings.[10]
Policymakers are taking meaningful steps to set common ESG regulatory standards and are developing standardised taxonomies for what qualifies as a sustainable activity. But given the current divergences, re/insurers would need to take the initiative to present their own views on which frameworks are best aligned with their ESG ambitions and principles. The re/insurer’s own view of a project’s E&S credentials becomes important as well.
This is especially true in situations where an action that advances some ESG goals may undermine other sustainability objectives. For example, hydropower projects have the potential to provide inexpensive renewable energy and are an important component of the clean energy transition, but new dams can also damage the surrounding ecology and biodiversity and displace local populations. Policies, ESG frameworks and ratings agencies’ criteria on such topics may also differ.
When dealing with such complex ESG issues, not only does the re/insurer need a thorough understanding of the measurable and non-measurable impacts of the projects on the environment and society, but also the ESG goals that the re/insurer is trying to achieve.
[1] From reinsurers’ ESG strategy documents, latest sustainability reports and website information as of May 2023.
[2] AXA XL: Enabling the offset; what role can insurance play in offsetting emissions, November 2022
[3] EIOPA: Technical advice on the integration of sustainability risks and factors in Solvency II and the Insurance Distribution Directive , April 2019
[4] Bank of England: Results of the 2021 Climate Biennial Exploratory Scenario (CBES), May 2022
[5] SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, March 2022
[6] The European Supervisory Authorities are the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA).
[7] FCA pushes back publication of new anti-greenwashing rules, 29 March 2023, Pensions & Investments
[8] European regulators launch greenwashing study, 15 November 2022, ESG Today
[9] TCFD stands for Taskforce on Climate-related Financial Disclosure and TNFD stands for Taskforce on Nature-related Financial Disclosure.
[10] MIT Management Sloan School: Why ESG Ratings vary so widely (and what you can do about it), August 26, 2019
