The Regulatory Landscape of Sustainable Insurance
When it comes to corporate responsibility and sustainable finance, insurances do not normally spring to mind. However, environmental, social, and governance (ESG) factors have become pressing issues for the industry during the last few years. One risk the industry faces is its exposure to the unpredictable effects of climate change. According to a 2018 Swiss Re study, average annual losses from natural disasters have more than sextupled in real terms since the 1980s. The need to clarify the impact of ESG factors on this industry and insurers’ obligation to integrate these factors into their fiduciary duty is becoming increasingly apparent.
Regulators are playing a critical role in this environment of evolving risk by facilitating insurance resiliency. Regulatory actions are moving in the direction of required consideration of ESG factors in insurance underwriting, business operations, and reserves.
In 2012, the UNEP FI launched the Principles for Sustainable Insurance (PSI) as a global framework for the insurance industry to address ESG risks and opportunities. Further specific ESG guidance under the PSI banner is expected for the industry by the end of 2019.
At the EU level, the EU Commission Action Plan on Sustainable Finance mentions the upcoming integration of sustainability risk and factors in investment decisions and advisory procedures for insurance and reinsurance. To accomplish this goal, amendments to Directive 2009/138 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) and Directive 2016/97 on Insurance Distribution (IDD) are expected. In addition, consideration of climate change mitigation may be incorporated into Solvency II.
Also, at the national level, policy is increasingly recognizing the importance of insurances giving more consideration to ESG factors. For example, the Austrian Insurance Supervision Act specifies that gender must not be used as an actuarial factor in calculating premiums and benefits in insurance contracts. In China, the Guidelines on Social Responsibility of the Insurance Industry set out specific goals for the sector such as the commitment to environmental protection, including the development of green insurance products.
Integrating ESG issues into the procedures and operations of insurers is emerging as an important step in the quest to reorient capital towards sustainable sectors to meet economic and social development goals.
For a complete overview of Policy Outlook initiatives that relate to the activities of insurers, please check the Policy Outlook tool.