Thomas Dawson and Stefan Holzberger

Stefan Holzberger, senior managing director and chief rating officer at AM Best, commented that the ratings agency sees the evolution of ESG regulation being quite similar to that of enterprise risk management several years ago. 

“It was an agenda that was driven largely by regulation,” Holzberger said. “If you were around during the development of Solvency II, which took quite a time to come together, that was really an appreciation for how important enterprise risk management concepts were with regards to regulation and the financial health of insurance organisations. 

“We see something quite similar developing on the ESG front. We do expect it will be the regulators that will drive the agenda on ESG.” 

Stefan Holzberger, senior managing director and chief rating officer at AM Best

A survey conducted by AM Best indicated that around half of respondents affirmed that they felt the regulatory community “will be driving that train”, said Holzberger, and increasing the reporting and disclosure of requirements around ESG.

“We really feel that ultimately it will be the regulators that write the rules and insurance organisations will have to follow them,” he said.

ESG-Risk-–-Sources-of-High-or-Significant-Stakeholder-Pressure

Tom Dawson, partner at McDermott Will & Emery, suggested that ESG will be a big focus for US, Bermuda and Canada regulators this year. 

For example, he noted that the New York financial services regulator has been particularly diligent in arranging seminars on the topic. It has been very focused on investment policy while its next session will be on metrics and targets, which will touch on what underwriters can and should be underwriting. 

“The NAIC in contrast is an organisation that moves relatively slowly,” Dawson noted. “It operates by consensus.”

Previewing this year, Dawson said disclosure will be a big focus. 

“What is immediately on the table is a few things, and that is true whether it is Bermuda, Canada or the US following the European lead. We will have more disclosure, it will be more granular. There will be a disclosure Mark II era that will move beyond industry agnostic type questions,” Dawson said.

He added: “We are at the very early stage of having very robust, more detailed disclosure requirements for insurers. By the end of the year I expect we will have a real sense of the direction that regulators, whether it is the NAIC or Bermuda or Canada, will be moving.” 

A second focus this year, Dawson believes, will be on embedding climate risk analysis within insurers’ existing requirements such as ERM or their own risk solvency assessment exercises on both sides of the Atlantic. 

Tom Dawson, partner at McDermott Will & Emery

There is the possibility of governance mandated changes this year. 

“I wouldn’t be surprised if the New York regulators release a governance framework with best practices,” Dawson said. “They are being pretty good about this and understand insurers come in various shapes and sizes. So proportionality is a byword to watch for the new York regulator, which is really encouraging.”

US catching up to Europe

Dawson noted that the US is behind in climate change regulation, certainly when it comes to disclosure.

“I think we’ll catch up quickly,” he said. “Nevertheless, Europe is in the lead and the UK is in the lead. And it will be interesting to see with Brexit whether the UK and Europe continue to be on parallel paths more or less with the same timing when it comes to climate change regulation. It is going to be an interesting question.”

Dawson noted that all regulators belong to the IAIS, which has been active in holding a number of consultations and driving best practices at a very high level.

AM Best’s Holzberger noted that industry bodies within the insurance industry are engaging with the regulatory community to try to build a more consistent approach to ESG reporting. 

“But I think that will be a long, uphill struggle,” he said. “Large diversified organisations will have to report different disclosures across different geographies probably for the foreseeable future.”

Holzberger added that 10 percent of AM Best ratings movements are the direct result of an ESG factor, such as a catastrophe loss, highlighting the importance of the issue. However, including rating affirmations, that figure drops to 2.5 percent.

To learn more about ESG and how it is shaping the future global insurance industry, click the link below to watch the latest episode of Prospective. It includes a series of interviews with leading industry ESG experts…