Fitch expects growing ESG influence on underwriting, investment

Insurers will pay greater focus to issues relating to sustainability, social impact and governance as part of their underwriting and investment screening processes, Fitch Ratings says in a report.

Fitch says the growing environmental, social and governance (ESG) trend reflects in part stakeholder pressure on the industry to step up, especially on the climate front.

“The influence of ESG issues on insurers’ underwriting, and particularly their investment decisions, is likely to grow, especially for new business lines or projects, as social and regulatory pressures push more insurers to take ESG considerations into account,” the Fitch report says.

“In the longer term, sectors most exposed to ESG-related risks, such as emissions regulations and the rising cost of carbon, will face greater challenges in obtaining insurance.”

But Fitch does not expect the industry to completely pull out from insuring higher ESG-risk insureds and sectors, pointing out insurance underpins economic activity.

The rating agency says a lack of insurance cover cannot often be readily replaced by other institutions, unlike financing from banks, which can sometimes be substituted by accessing capital markets.

“Due to the critical role insurance companies play in the real-world economy, they are less likely than banks to entirely stop underwriting certain economic sectors, judging instead on a case by case basis,” the Fitch report says.

It says the insurance sector may need to rely on state support to preserve coverage for the worse affected segments, particularly for households.

“We believe that ‘facilitating the transition’ will become a vital route for the worst-affected insureds to continue to obtain policy cover, potentially at a much higher cost of premium, to manage the potentially costly transition to a low-carbon economy,” the Fitch report says.

According to the report, some insurers support the transition to a low-carbon economy by halting underwriting on projects associated with coal and oil sands, and by excluding coal and other fossil fuels from their investment portfolios immediately or in the longer term.

In the longer term too, many insurers envisage reducing their coverage or increasing the premiums charged for more-carbon-intensive industries.