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Strong governance and enterprise risk management practices will enable insurers to better manage ESG risks and opportunities, experts say.
ESG issues vary for different types of insurers, said Maura McGuigan, director, credit rating criteria at ratings agency A.M. Best Co. in Oldwick, New Jersey.
“When you think about property/casualty insurers, catastrophe risk comes to mind, when you think of life insurers, it’s more about the “S” in terms of changing demographics and things of that nature. Governance and ERM applies to insurers across all lines of business,” she said.
Weather-related losses and governance or enterprise risk management — either improvements in ERM, or failures in ERM — are the two ESG factors that most frequently are a primary factor in a rating change or change in outlook for insurers, she said.
From the ratings perspective for businesses in all sectors, the governance part of ESG has been quite prominent and incorporated in rating methodologies for many years, said Patricia Kwan, director and ESG subject matter expert at Standard & Poor’s Global Insurance Ratings, in New York.
“Management governance has been one of the corporate staples when we look at the rating construct,” she said.
S&P considers risk management and mitigation a governance factor under ESG. A company’s inability to properly prepare for, respond to, or recover from a cyberattack could lead to rating pressure, for example.
Compliance issues are one of the biggest drivers of insurance claims for financial institutions, according to a recent report by Allianz Global Corporate & Specialty SE.
“Failings in governance and risk controls have brought large losses from a number of different areas,” the report said.
Brokers and insurers have long focused on helping companies mitigate climate risks, but managing a broad spectrum of environmental, social and governance concerns is becoming a critical part of how the industry does business.