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Climate Disclosure Heats Up in Insurance Industry

Renewable Energy Systems. Electricity Maintenance Engineer working on the field at a Wind Turbine Power station at dusk with a moody sky behind. Blurred motion.

Kroll Bond Rating Agency (KBRA) notes that stakeholders are increasing pressure on (re)insurance companies to enhance the focus on, and attention to, climate-related disclosure.

KBRA believes stakeholders will continue to challenge (re)insurers on climate change, and those entities that have a well-articulated, balanced game plan will be best positioned to shape the conversation and maintain their financial strength. In recent days, several significant climate change announcements have occurred across the (re)insurance sector:

  • The International Energy Agency (IEA) issued a report calling on insurers to immediately cease underwriting oil and gas projects by the end of this year.

  • Lloyd’s of London (KBRA-rated AA-/Stable), the largest insurance market in the world, published a detailed report outlining its multi-pronged approach to climate change.

  • In response to investor demand for greater transparency and uniformity of data on climate change, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler said the regulator was considering mandatory climate disclosure rules by the end of 2021, including industry-specific requirements for some sectors such as insurance (see KBRA Comments on SEC’s Mandatory Climate Disclosure Rules).

In KBRA’s opinion, all these developments underscore that the credit implications of climate change for (re)insurers are inextricably linked to understanding and managing transition risk and how to balance the response to stakeholder demands for rapid action with the longer-term financial and operational consequences to the company, the industry, and the global markets of a low/net zero carbon economy.

Raising the Volume on Climate Change

As climate change conversations intensify, various stakeholders are turning up the heat on (re)insurance companies to immediately cease certain underwriting and investing activities. Such demands can bring needed focus and attention to a critical topic. However, KBRA believes it equally important for (re)insurance companies to consider both the positive and negative implications of these demands over near, medium, and long-term time horizons and clearly articulate and disclose the rationale for their approach when addressing stakeholder concerns.

Insurance underpins the resilience of the economy by supporting the recovery of individuals, companies, and communities after experiencing a loss. As noted by the industry for decades, global temperatures and catastrophe losses remain on a steady upward trajectory, yet the world remains underinsured for a large proportion of catastrophic and weather-related events. This is the main driver behind efforts to close the protection gap across both developing and developed economies.

fig.1 Worldwide Natural Catastrophes.PNG

KBRA believes that acceding to demands for (re)insurers to immediately cease underwriting environmentally unfriendly businesses, such as oil and gas, coal, tar sands, and Arctic drilling, may undermine other sectors of the economy, particularly in developing economies, which could have meaningful negative social welfare consequences. By the same token, the immediate adverse impact on revenues and near-term bottom-line results of (re)insurers could potentially damage longer-term financial strength and ultimately the industry’s ability to fulfill its promises to policyholders. In addition, rather than causing a halt in business activity that is perpetuating further environmental damage, immediate cessation of underwriting activities may simply drive (re)insurance from regulated markets to private or offshore structures that provide far less transparency, potentially working against efforts by (re)insurers to facilitate solutions to address climate change.