Pressure mounts on insurers over ESG risks

Insurers face increasing pressure to address environmental, social and governance risk as Moody’s and other credit rating agencies warn of looming vulnerabilities for the sector.

Earlier this week, Moody’s published a report that highlighted multiple ESG problems at insurers, and warned that some companies would struggle to meet their financial obligations without swift action.

“We are seeing these risks become more significant. Look at property and casualty insurance . . . catastrophic events like wildfires [are happening more frequently] with the increasingly unpredictable severe weather,” said Brandan Holmes, senior credit officer at Moody’s.

The comments are likely to be closely watched by investors since climate risk has sparked growing alarm — and action. Recent weather shocks, such as hurricanes and the current European heatwaves, are already threatening to raise underwriting costs for the sector.

Another looming threat is that the insurance companies’ vast portfolios hold assets whose value could shrivel because of climate change.

Most notably, as the world transitions to a low-carbon economy, as much as $10tn of fossil fuel assets could become “stranded” as regulations and clean energy sources make those investments economically unviable. Since insurers oversee about one-quarter of all invested assets in the world, this could be a potential time bomb for the industry, Moody’s notes.

A third challenge is that insurance companies could face shareholder, activist and employee protests over the businesses they cover. Until now these pressures have primarily affected European groups.

But Chubb last week became the first US insurer to say it will no longer sell insurance policies to coal companies, and this may force other American groups to follow suit.

In addition to grappling with environmental pressures, life insurance groups also face big social risks. The US opioid crisis has, for example, injected new uncertainties about how to predict future claims.

The warnings from Moody’s are echoed at other rating agencies. Fitch has announced plans to publish information on how ESG factors affect individual credit-rating decisions.

Meanwhile, S&P Global Ratings began offering company-specific ESG reports in April. Although ESG has always been a part of S&P’s credit rating process, this marks the first time that the rating agency has identified these risks on a granular level, said Mike Ferguson, sustainable-finance director.

S&P has also published research that analyses how ESG factors have influenced their ratings decisions. This shows that between 2015 and 2017, the agency upgraded or downgraded a corporate rating 42 times because of social risks, 77 times because of changes in governance risk and 106 times as a result of an environmental risk.

One high-profile case was Equifax, a consumer credit rating agency. Its rating was reduced to a negative outlook in late 2017 because of governance problems that came to light after a massive data breach and numerous accusations of insider trading.

Recent events at Lloyd’s of London have also served as a wake-up call in relation to ESG issues, S&P analysts say.

This year the company has faced an explosion in sexual harassment complaints, prompting its chief executive John Neal to emphasise cultural change as a part of his plan to overhaul the insurance industry.

This has been painful for the group since it has also absorbed billions in losses in 2017 and 2018 from exposure to natural disasters.


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