ESG Considerations Seen Increasingly Influencing Insurers' Strategies

In the years ahead, insurers' underwriting and investment strategies will be increasingly influenced by environmental, social, and governance (ESG) considerations, according to Fitch Ratings.

In a new report, "Global Insurance through an ESG and Sustainability Lens," Fitch said that evolving strategies could reshape some insurers' credit profiles, potentially affecting their credit ratings.

Property-casualty insurers' large weather-related losses highlight the increase in environmental physical risks that many experts link to climate change, the rating agency said. In response, Fitch said it expects property-casualty (re)insurers to increase premium rates and, in some cases, pull back from the market as underwriting risks increase and become more unpredictable.

"Climate-related transition risks are likely to reduce returns on assets related to carbon-intensive industries held in insurer investment portfolios, and will therefore influence insurers' investment strategies," a Fitch statement said. "Life insurers will be more affected given the longer duration of their portfolios."

Fitch noted that environmental risks have been in the spotlight this year due to several severe windstorms and wildfires. But social risks, such as the mis-selling of investment-oriented products, and governance risks, such as intra-group transactions, are also important ESG consideration for insurers, the rating agency said.

"We expect the sector to continue insuring industries with high environmental risk as these industries adapt to become more sustainable," Fitch said. "However, the worst-affected businesses and households may also need access to new government insurance schemes, and some may eventually struggle to obtain insurance."