European insurers, reinsurers lead climate risk disclosure, mitigation

European insurers and reinsurers are leading the way on climate risk disclosure and mitigation while Japanese insurers are improving their performance and U.S. insurers continue to lag behind, according to a new report. 

European sector players such as Paris-based Axa Group and London-based Aviva P.L.C. are at the forefront in addressing climate risk with AAA ratings, followed by Munich-based Allianz S.E. and London-based Legal & General Group P.L.C. with AA ratings, according to the latest report by the Asset Owners Disclosure Project, which collected information about the 80 largest global insurers’ recognition of and responses to climate-related risk. Legal & General was also the most improved insurer in the index, moving up eight rating bands from last year, according to the report.

The top insurers and reinsurers have generally made substantial green investments and/or have pledged to or already stopped underwriting and investing in thermal coal assets.

Japanese insurers have made notable improvements on climate risk disclosure and now rank above U.S. firms in addressing climate risks in their portfolios, according to the report. Japanese firm Tokio Marine rose six rating bands to a BBB rating, having been rated D in 2017.

All but three U.S. insurers assessed have no plans in place to decarbonize their portfolios or address climate-related financial risks.

“Perhaps unsurprisingly, the wealth of debate around climate disclosures means European insurers continue to dominate the leaderboard,” the report said. “In contrast, with 43% of the poorly (D or X) rated insurers, the U.S. is home to the most laggards. That said, an assessment of climate disclosure at The Hartford, MetLife, and Travelers provide evidence that certain U.S. insurers are getting serious about tackling these issues.”

Hartford, Connecticut-based The Hartford received a CC rating compared to the CCC rating in 2017, while New York-based MetLife Inc. and New York-based Travelers Cos. Inc. received C ratings this year – an improvement from the D ratings they received in last year’s report.

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures released a set of voluntary recommendations to guide companies in assessing the material risks climate change poses to their operations and develop plans to mitigate these risks. The TCFD recommendations, which cover four core elements: governance, strategy, risk management and metrics and targets, provided the framework for the project’s assessment of the dual role of these companies as insurers and asset owners.

“Climate-related issues are primarily viewed as a risk related to underwriting and investment portfolios, not as a business opportunity,” the report found.

Just a third of insurers surveyed can say their approach to investing is climate-aware, as 34% have introduced policies, objectives and strategies that aim for alignment with the goals of the Paris climate agreement on energy transition or have integrated climate risk policy across asset portfolios, according to the report. Despite these “encouraging” steps, 41% have not formalized their approach to climate-related risks and portfolio management, the report found. A further 25% applied a limited approach that is guided by a broad set of sustainability principles, but is not explicit about climate issues.

The most common climate-relevant policy commitments covering portfolio management relate to capital allocation to invest in renewable energy assets, reduce exposure to carbon-intensive assets by excluding fossil fuels or increase involvement in the rapidly growing green bond market, according to the report.

“Ceasing underwriting and investing in thermal coal is becoming a barometer of commitment to climate action,” the report stated. “Due to recent high-profile campaigns and corporate failures in the coal sector, insuring, underwriting and investing in thermal coal assets has proved to be controversial for insurers. The survey results show that work needs to be undertaken on formalizing approaches and creating a common set of guidelines related to exclusion of thermal coal assets.”

For asset owners, climate scenario analysis is a key tool under the task force recommendations, but its use remains in its infancy, and only 10% of the assessed insurers have undertaken scenario analyses, with 8% considering their approach, according to the report.

The survey shows that 30% of insurers use engagement with companies as a risk management or mitigation tool.

“Promoting improved disclosure is more widespread than promoting actions such as linking remuneration with climate targets,” the report stated. “Few insurers have a clearly identified mechanism to escalate engagement.”

There is a variety of approaches to portfolio and insurance risk analysis, with analysis of physical risks in response to weather events being more common. 

“Carbon footprinting is the most commonly reported technique used for portfolio risk analysis,” the report said. “The analysis of value at risk from weather-related events was commonplace, but few insurers reported assessing their liability risk or other transition risks related to climate change.”