A report from Fitch Ratings says that ESG factors will become more important in the underwriting and investment strategies of insurers in the coming years.

The huge weather-related losses suffered by P&C insurers underscore the expanding environmental and physical risks associated with climate change, according to Fitch.

As a result, the rating agency expects P&C re/insurers to raise premium rates and, in some cases, withdraw from the market as underwriting risks rise and become more unpredictable.

Fitch also says that climate-related transition risks are likely to lower the returns on assets in insurers' investment portfolios that are related to industries that use a lot of carbon.

It also says that this will change how insurers invest, with life insurers being more affected because their portfolios last longer.

Fitch also says that social risks, like the mis-selling of investment-oriented products, and governance risks, like intra-group transactions, have gone unnoticed this year because environmental risks have been in the spotlight so much. However, these are also important ESG factors for insurers to think about.

Fitch writes, “We expect the sector to continue insuring industries with high environmental risk as these industries adapt to become more sustainable. But the worst-affected businesses and households may also need to use new insurance programmes from the government, and some may have trouble getting insurance in the end.

“EU-based insurance groups are leading the sector’s integration of ESG into management decisions. However, it is difficult to truly compare and measure insurers’ adherence to ESG principles due to different taxonomies and interpretations of E, S, and G.

“Efforts to harmonise international sustainability disclosure standards are a positive development, but much will hinge on how national authorities interpret and implement the international standards, and the extent to which ‘greenwashing’ and ‘social washing’ practices continue.”

Fitch also says that the changing strategies could slowly change the credit profiles of some insurers, which could affect their ratings.

Also, insurance broker Marsh has released the results of a survey of 30 insurers that cover a large part of the UK insurance market. The survey looked at how ESG factors are being used to evaluate clients' risk profiles and how much this trend might grow.

The respondents to the survey said that ESG factors would become more important in future underwriting. Marsh said that it is significant for risk managers to know where they are on their own ESG journey.

Source: Reinsurance news

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