The growing recognition of ESG factors amongst US insurers

In March 2019, the Reinsurance Group of America (RGA) became the first US-based insurance firm to sign the Principles for Responsible Investment. Headquartered in St. Louis, Missouri, RGA is among the leading global providers of life reinsurance and financial solutions. This was exciting news for us – an attestation to the growing recognition of ESG issues in the US insurance sector. Timothy Matson, RGA’s EVP & Chief Investment Officer said: “We believe that incorporating environmental, social, and governance (ESG) factors into investment decisions can broaden investment opportunities, impact investors and society, and enhance investment performance. Becoming a PRI signatory is a part of RGA’s commitment to responsible investing and building a sustainable future.”

According to BlackRock’s 2018 Global Insurance Survey, 59% of North American insurers have already adopted ESG investment policies. The survey also showed that the percentage of North American insurers that consider climate to be the most serious macro risk to their firm’s investment strategy over the next 12-24 months, saw a marked rise from 9–21% in just one year. While the report found European insurers to be leading the way in ESG integration, there is a shift in the sentiment amongst investors, regulators, and supervisors in the US towards the relevance of ESG factors.

In 2006, the National Association of Insurance Commissioners (NAIC) formalized the Climate Risk and Resilience Working Group to address the impact of climate change on insurers and insurance consumers. It is chaired by Washington State Insurance Commissioner Mike Kreidler. Commissioner Kreidler highlights the importance of disclosure around climate risk and how Washington State is facilitating this in alignment with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations:

“The insurance sector wields a great deal of economic power. In the United States alone, industry investments total more than $5 trillion. Some of these investments are helping our country toward a low-carbon economy and mitigate the effects of climate change, and I would like to see this trend accelerate. That’s one reason some of my colleagues and I conduct an annual climate risk disclosure survey every year. It’s also why I support the efforts of the Sustainable Insurance Forum, of which I am a founding member, to encourage insurers to report using the guidelines developed by the Task Force on Climate-Related Financial Disclosures. This work is a key aspect of the job the citizens of Washington state have elected me to do: make sure that insurers remain solvent so they can pay claims in the face of our changing climate and the related risks.”

The insurance industry is significantly exposed to risks posed by the increasing frequency and intensity of extreme weather events, as well as the global transition towards a low-carbon economy. Physical risks related to severe weather conditions can impact insurance liabilities, increase uninsured losses for consumers, and affect credit and lending activities for assets located in high-risk areas. Moreover, the shift in policies and technologies enabling an adjustment to the low-carbon transition can lead to risks from changes in demand for insurance products and services, stranded assets, as well as reputational risks for investors operating in carbon-intensive sectors.

Physical risks related to severe weather conditions can impact insurance liabilities, increase uninsured losses for consumers, and affect credit and lending activities for assets located in high-risk areas

In the face of these multiple expected outcomes around predicted shifts, climate scenario analysis can be a useful tool for insurers to evaluate their resilience to transition risks, and how those risks could impact capital allocation at the sector and portfolio level. In 2018, the PRI, together with then California Insurance Commissioner Dave Jones, backed the launch of the Paris Agreement Capital Transition Assessment or PACTA tool, developed by the 2⁰ Investing Initiative. The tool provides an analysis of the exposure of investor portfolios to transition risks across multiple climate scenarios. The California Insurance Department conducted forward-looking scenario analysis for state insurers to model the expected impacts of transition risks in the oil, gas, thermal coal and utilities sectors. This analysis underscored the long-term financial risks facing investments in thermal coal.

Addtionally, the PRI’s work on ESG in credit ratings sheds light on how ESG factors are gaining prominence in credit rating agencies’ commentaries, which are especially relevant for insurers given their large investments in fixed income securities.

Unfortunately, the uncertainty of climate-related phenomena and policy responses, along with the lack of comparable ESG information, make climate- risk modeling highly complex. Indeed, 70% of insurers surveyed by BlackRock felt they lacked the expertise to model ESG variables. Consequently, insurers are looking to regulators to provide greater clarity around ESG definitions and integration, and there have been some encouraging developments at the global level.

Organizations such as the Principles for Sustainable Insurance (PSI), the Sustainable Insurance Forum (SIF), the International Association of Insurance Supervisors (IAIS), and the Central Banks and Supervisors Network for Greening the Financial System are working collaboratively to address sustainability challenges in the insurance sector. In July 2018, the SIF and IAIS collectively published a comprehensive paper on climate change risks to the insurance sector, also highlighting the efforts of the NAIC, and the Washington and California Insurance Departments. The latest development in this regard is the supervisory statement issues by the UK’s Prudential Regulation Authority on “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”.

While US insurers, supervisors and rating agencies have been part of, and currently lead on some of these developments, a larger, collective shift in the country is needed to ensure long-term financial risks and opportunities in the insurance sector are identified, and effectively managed.

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.

If you have any questions, please contact us at [email protected].