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Home / Insurance / ESG issues entail greater risks, more scrutiny

ESG issues entail greater risks, more scrutiny



Environmental, social and administrative activities and how companies disclose and report them come under increased scrutiny, exposing companies to a growing number of risks.

Threats of legislative action, shareholder activism and increased societal concerns. around a range of issues has created potential debt for a wide range of companies. Insurers, reinsurers and brokers are responding to the growing concerns with a growing body of insurance cover, risk management services, technologies and methods designed to transfer or manage ESG exposures.

While much of the focus has been on climate risk and corporate finance risks as they transition to a low-carbon economy, reputational risks also come to the fore as organizations increasingly find themselves held accountable for ESG issues.

Social issues have also increased in importance from the #MeToo and Black Lives Matters- movements, along with considerations of diversity, justice and inclusion, experts said.

Cyber ​​is an ESG risk trend that is of significant concern, driven by the increasing frequency and severity of cyber attacks and increased data security regulations. In Allianz Global Corporate & Specialty SE's 2022 Risk Barometer released in January, respondents ranked cybersecurity as their top ESG priority. Climate change was ranked as the second largest ESG problem.

Pollution incidents and environmental disasters and a lack of diversity on boards and in the workforce rounded out the biggest ESG problems, Allianz said. Disruptions in the supply chain are also seen as a top threat because companies will be under pressure to be more transparent about their suppliers and the environmental impact of their supply chains.

Rising demand

Demand for ESG-specific coverage is growing, says Meredith Jones, Nashville, Tennessee-based partner and global head of ESG at Aon PLC. The brokerage currently offers more than 50 ESG-related services across its risk diagnoses, risk advice and risk transfer methods, she said.

ESG is a focus area for Aon this year, Jones said. "Government pressure, litigation risks, social pressure are merging," she said.

Historically, ESG interest has been high among companies with high environmental or personnel exposure, such as those who have problems with labor safety or high greenhouse gas emissions, Jones said.

"Pharmaceuticals, healthcare, technology, banking – it has reached many different types of customers," she said.

Renewable energy, electric vehicles, parametric insurance and ESG-focused liability insurance for directors and officials are some of Areas where insurance companies are focused on ESG, according to a December report from Oldwick, New Jersey-based rating agency AM Best Co. Inc.

Existing insurance coverage and products will be developed, and new ones will emerge that address the growing number of ESG risks, Best said in the report.

Several insurance organizations, including Lloyd & # 39 ;s of London and Zurich Insurance Group Ltd., announced plans to expand its insurance coverage to target the green energy sector ahead of the UN COP26 meeting held in late October and early November 2021, for example.

Although the initiatives are expected to be small. Initially relative to the total deal being written, they could become more material in the medium to long term, Best said in the report.

The renewable energy sector and the insurance market that supports it are growing explosively, says Brian Tyluki, New York-based senior vice president and senior underwriter at GCube Underwriting Ltd., a unit of Tokyo Marine HCC.

By 2026, global renewable electricity capacity is expected to increase by more than 60%, according to the Paris-based intergovernmental organization International Energy Agency's annual renewable market report energy sources published in December. "Renewable energy will account for about 95% of the increase in global power capacity by 2026, and solar energy will account for half of that. The writing is on the wall," said Mr. Tyluki.

"We do not have enough people for to adequately manage the level of submissions we see in terms of the renewals we handle and new business, "he said. [19659002] The projected growth of renewable energy is driven by stronger support from government policies and more ambitious clean energy targets many insurance companies have also set emission targets for their organizations and a growing number have said they will limit coverage for companies building or operating coal mines and facilities.

Environmental insurance, regardless of whether it's a site-specific policy or coverage for contractors working in one place, becoming much more mainstream, said Daniel Drennen, National Environmental Practice leader at Amwins Group Inc. in Atlanta.

Previously, only about 15% to 20% of policyholders would buy environmental insurance, but now "you definitely see tremendous growth in this area," said Drennen.

[19459008Riskmanagement

As insurance coverage develops, there is an increased focus on ESG risk management, experts said.

] Customers want to know to what extent their management of ESG risks will be reflected in their insurance programs, said Amy Barnes, London-based Head of Sustainability and Climate Change Strategy at Marsh LLC. [19659] 002] "In some areas, such as directors and officials, we have good data that shows us that there is a clear link between good ESG risk management and improved D&O warranty performance, "said Barnes. Marsh in October last year introduced a responsibility initiative for board members and officials around ESG (see related history).

Part of the challenge of managing ESG risks is limited data, Barnes said. "Basically, we believe that a company with good ESG risk management will be a better liability risk, that a company that is trusted will have fewer or less serious liability losses, but we can not prove that connection yet," she said. [19659002] "Most companies have revealed corporate social responsibility in their statements and proxies for several years, but there is an increased focus from the US Securities and Exchange Commission, government regulators and others on how companies manage risks," said Ziad Kubursi, New York-based chief executive. . of financial, management and transactional responsibilities at Hartford Financial Services Group Inc.

In the past, companies were not held accountable for what they did or did not do in connection with corporate social responsibility, but ESG disclosure regulations change the dynamics, he said. [19659002] "Now you will see enforcement measures, shareholder measures and client / customer concerns about the companies they do business with and buy c. Surpluses from, and all this has an impact on board members 'and salaried employees' liability insurance," said Kubursi.

Insurance companies can play an important role in ESG risk management, for example by advanced modeling of climate risks and by stimulating change by putting capacity into a sector or by encouraging property reconstruction in a more resilient way, several experts said.

QBE introduced in November last year a tool to provide companies with a risk management framework for assessing ESG risk, said Mark Pasko, General Counsel. and Corporate Secretary at QBE North America, New York.

“The tool asks risk managers and policyholders a series of questions to challenge them to think about sustainability, what they have in their business, how they market and behave. It makes them think critically about what their business looks like, to be honest about what sustainability is, "said Pasko.

Traditionally, a company may not have looked at the building materials in its buildings or at its energy practices and operations, and "Now they should," he said.

ESG risk management is "good business for us too, because risks that think about sustainability are usually better risks for us," he said.

Opportunities – and risks

Despite growing opportunities for insurers in the development of ESG-related coverage and risk management tools, the products and services do not come without risks, experts said.

In the renewable energy sector, the pace of project development, constantly evolving technologies and rising natural disaster risks can be challenging, says Tyluki from GCubeube , an insurer for on- and offshore wind, solar and energy storage risks in Europe and the US.

A 2019 hail loss at a solar farm in Midland, Texas, resulted in a $ 75 million loss for GCube as it insured access to %. "Especially the loss-making industry," and since then the insurer has taken steps to significantly reduce its exposure by sub-limiting natural disaster risks, Tyluki said.

Insurers and reinsurers face risks in terms of both assets and investments. side of their business from climate change.

If the emissions guarantee is insufficient, there is a risk that the coverage may be incorrectly priced, said Jones from Aon. There is also an investment risk if the insurance companies do not take full account of ESG problems, she said.

Aspects of corporate social responsibility and governance of ESG have always been a risk for companies, but investors and insurers are asking more questions to organizations, says Keith Fortson, global head of ESG at Riskonnect Inc., an Atlanta-based risk management technology [19659002] "There has been a fundamental change in the insurance company's landscape on both the asset side and the debt side," Fortson said. For example, many assets held by insurance companies that were previously considered stable, such as real estate, are changing with ESG concerns and the effect of different weather patterns, he said.

“We see reallocations of assets, and the same objective applies to the debt side. If I'm going to write a policy for you, I need to make sure you have all these risks covered, said Mr Fortson.

When insurance companies try to meet the risk financing needs of companies moving to a greener economy, the underlying risks may be more nuanced

It's crucial for insurance companies to do their due diligence regarding ESG, says Ralph Banbury, London-based management liability guarantor at CFC Underwriting Ltd.

"There is a huge focus on the environment, as it should be, but the social the pillar is just as important, ”said Banbury. The social pillar includes employee well-being, health and safety, cyber protocols, supply chain and diversity and inclusion.

With the increase in litigation, companies face growing D&O risks from ESG risks, whether due to failure to act, lack of adequate procedures in place, or the potential for "greenwashing" or exaggerating their ESG tasks, he said. Companies may also come under fire for the use of child labor in their supply chains, he said.

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