Financial services and ratings provider Moody’s (NYQ:MCO) has developed a tool that factors ESG risks into property and casualty (P&C) insurance underwriting.
- Moody’s has launched its ESG Insurance Underwriting Solution to help P&C insurers integrate ESG risk factors into their underwriting workflows.
- A lack of clear standards and concerns over returns on investment have slowed the P&C sector’s adoption of ESG risk data.
- New frameworks and improving supply chains will be crucial in steering the insurance industry’s transition away from entrenched business models.
Property and casualty (P&C) insurance companies are highly exposed to the physical effects of climate change, and to associated risk factors emerging during the transition towards sustainability.
Integrating ESG data into their risk management activities is vital, as their underwriting and portfolio management activities control a large category of global investable assets.
Moody’s solution was developed in collaboration with the Chaucer Group, which also helped it develop a scorecard and framework to analyse ESG risks. The partnership benefited from Moody’s acquisition of RMS in 2021, which has improved its capabilities in assessing climate, cyber and supply chain risks.
Chaucer CEO, John Fowle said: “the (re)insurance industry has a pivotal role to play in helping corporates make the transition to become more sustainable. This isn’t going to happen overnight, but by helping clients identify, manage and measure areas that are in need of improvement, we can help them implement incremental changes that will pay dividends in the long-term.”
Moody’s platform includes double materiality to enumerate ESG risks
Aiming to reduce the confusion resulting from a lack of clear standards, Moody’s solution helps insurers identify relationships between ESG factors and financial-risk metrics by providing a company-specific view of ESG risk, generates indicators and scores, tracks performance and monitors trends across policies and portfolios.
The Chaucer Group’s reinsurance specialty has helped Moody’s development of an ESG assessment framework and scorecard.
Reinsurer’s essentially provide insurance to insurance companies. They allow insurers to spread out their accumulated risk, preventing them from taking on more than their balance sheets would allow.
While ESG risks to a business are important in determining their impact on a company or asset’s financial performance, double materiality disclosure brings an additional dimension.
It provides an assessment of environmental and social risks in addition to standard financial factors, enabling a more holistic view of the investment and underwriting risk taken on by insurance companies.
Adding double materiality data and analytics makes clear sense for P&C insurance companies, as they serve a dual role as both insurers and investors in assets that are highly vulnerable to climate risks.
Most of the major providers of ESG data and analytics claim to provide solutions that meet the insurance industry’s needs. Moody’s claims its solution is differentiated by being specifically designed for insurers and developed in collaboration with a specialist reinsurer.
The UNEP FI’s principles of sustainable insurance initiative
The costs associated with extreme weather events across the globe are rising year-on-year. This is becoming a major issue for the insurance industry, which holds over $30 trillion in assets based on estimates from the United Nations Environment Program Finance Initiative (UNEP FI).
In response, the UNEP FI has developed a global sustainability framework for the insurance sector, dubbed the principles for sustainable insurance (PSI), which has gained an increasing number of signatories each year since its release.
The PSI initiative was launched at the UN Conference on Sustainable Development in 2012, and is widely considered the largest collaboration to date between the UN and the insurance industry.
Its reception is highlighted by the incorporation of its principles into the insurance industry criteria of the Dow Jones Sustainability Indices and FTSE4Good.
There are four main principles of the PSI initiative:
- Embedding ESG issues relevant to insurance in decision making.
- Collaboration between clients and business partners to raise awareness of ESG issues, manage risks and develop solutions.
- Working with governments, regulators and other key stakeholders to promote widespread action across society on ESG issues.
- Demonstrate accountability and transparency by regular public disclosure of progress in implementing the principles.
Over 140 organisations worldwide have signed up to the UNEP FI’s PSI initiative, representing more than 25% of global insurance premium volume and $14 trillion in assets under management.
While the number of insurers making PSI pledges is on the rise, the industry has lagged behind other financial service sectors when it comes to integrating ESG metrics into its investing and underwriting operations.
This has largely been attributed to the high cost of implementing the principles, their potential impact on investment returns and a lack of clarity regarding ESG standards.
Existing insurance policies tend to limit claims to making ‘like for like’ repairs, but integrating ESG issues into repairs and replacements, per the first principle, can result in cost overruns.
The principles are also lacking in overall alignment with global supply chains, though this stems as much from insurer policies as it does from a failure to improve supply chains in line with ESG considerations.
As new buildings, property, equipment and machinery are built with ESG compliant materials, these contradictions are likely to dissipate.
How the P&C insurance industry will reframe its repair and replacement legacy to accommodate this transition, however, remains a crucial question.