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Goldman Sachs AM: insurers could raise premiums and exit business lines due to climate change

38 per cent of survey respondents said they believed climate change will force them to exit certain business lines (Photo: joebelanger/Envato)
38 per cent of survey respondents said they believed climate change will force them to exit certain business lines (Photo: joebelanger/Envato)

Research by Goldman Sachs Asset Management has found challenges in insuring certain business lines exposed to extreme weather events, with experts pointing to property and casualty as the areas most at risk.

In order to protect their own businesses from climate change risks, insurers are indicating that their underwriting offering to companies might change.

Goldman Sachs Asset Management’s annual global insurance survey shows that a majority of respondents believe climate change will impact their ability to provide insurance options for extreme weather events, while only 10 per cent said climate change would not have any impact on their insurance capacity.

The data reflects the views of chief insurance officers and chief financial officers from 343 insurance companies worldwide, representing more than $13tn in assets.

The responses were collected in the first half of February 2023, with life insurers being the most represented category (at 39 per cent), followed by property and casualty (29 per cent). Europe, the Middle East and Africa accounted for the highest response rate (43 per cent), followed closely by the Americas (40 per cent) and Asia (17 per cent).

Survey results showed that 38 per cent of respondents said they believed climate change will force them to exit certain business lines, 34 per cent agreed that price increases will be necessary in certain insurance lines to compensate for extreme weather events, while 17 per cent noted that climate change has made certain weather-induced risks “uninsurable”.

GSAM did not provide additional information on which business lines were most at risk, but property and casualty insurance is generally seen as the most exposed to the effects of climate change.

“Property risks are naturally the most-exposed to climate change and extreme weather events; however, risks spread to casualty also,” commented Michael Gregory, head of underwriting strategy at British insurer RSA.

He highlighted, for instance, flooding as one of the biggest natural risks in the UK, with mitigation and prevention focusing on the use of flood mapping, technological sensors, more sustainable rebuilds or improving flood barriers. Still, he noted that these measures will not be enough to counter the aftereffects of extreme weather events.

“At this stage, we haven’t yet got to the level of prevention and/or mitigation where, as an industry, we have the ability to stop smaller weather events morphing into larger-scale disaster losses.”

A recent staff paper by the European Insurance and Occupational Pensions Authority assessed how nature-related risks can translate into risks to reinsurers’ assets and liabilities.

Eiopa consequently noted that regulators should start integrating nature-related risks into prudential and conduct-based supervisory frameworks. This was in line with previous research, which indicated that these type of risks are neglected by insurers.

Other ESG findings

The GSAM survey also looked at general trends, such as how insurers view inflation and how they intend to allocate future capital.

How to mitigate one’s portfolio against stranded asset risk is a very significant conversation on insurers’ minds, commented Matthew Armas, global head of insurance at GSAM.

Assessing the viability of an asset through time — taking into account changing economics, the energy transition and companies’ transition plans — is also visible in insurers’ investment decisions, noted Armas.

He pointed at 90 per cent of respondents considering environmental, social and governance-related factors throughout their investment process — a remarkable change from 2017, where 68 per cent said these were not a consideration

Armas also mentioned current and future regulation as reasons for ESG investment allocation, with 34 per cent of respondents having set a net zero target for their investment portfolios. Notably, this figure is skewed towards insurers in Asia and Emea, as only 7 per cent of respondents in the Americas had set such a target, according to the survey results.

Although insurers stated that negative screening and avoidance were the most common ESG considerations in investment portfolios, campaigners have called on insurance companies to do more by demanding they phase out all insurance services to fossil fuel companies and divest all assets that do not have a credible 1.5C pathway.

The US Securities and Exchange Commission’s long-awaited climate-disclosure rules will certainly be helpful in making informed decisions, Armas said.

The survey showed that, at present, third-party data by ESG rating agencies is insurers’ main source for the management and reporting of investment portfolios’ ESG profiles.

A service from the Financial Times