Key sustainability factors are now recognized as potentially significant for the success, safety and soundness of the insurance sector – inspiring reactions by supervisors and regulators. In its role as risk manager, risk carrier and investor, the global insurance sector plays a cornerstone role in the management of sustainability-related risks and opportunities. The risk transfer tools of insurance along with the deployment of its long-term capital base are highly relevant for many of the 17 Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change. Of the range of interlocking sustainability challenges, three issues stand out as critical: i) natural hazards, where only 30% of losses are insured, and just 2% in low- and middle-income countries; ii) climate change, set to exacerbate physical risks and requiring investment in decarbonization; and iii) access and affordability, with insurance a critical element of basic economic resilience against environmental hazards and shocks.
The insurance sector is responding to sustainability challenges with strategic action across both underwriting and investment, including through the UN-backed Principles for Sustainable Insurance (PSI). Leading insurers are incorporating environmental factors into the provision of insurance coverage and their underwriting strategies, reallocating capital towards green assets, and integrating environment, social and governance (ESG) factors in asset allocation and stewardship activities. Such approaches are not, however, the norm: only 20% of global premium volume is covered by companies that have signed the PSI.
Policymakers are recognizing that reforms within the financial system as a whole can be helpful to effectively mobilize private capital to respond to sustainability challenges. Global momentum on sustainable finance policy and regulation has advanced significantly, with recent action at the international level such as Financial Stability Board’s Task Force on Climate-related Financial Disclosures (FSB TCFD) and the G20’s Green Finance Study Group (GFSG).
A growing number of insurance supervisors and regulators are beginning to incorporate sustainability into the way they oversee the sector. Over the last two years, there has been a noted shift in how supervisory and regulatory institutions are approaching sustainability issues, with a growing number of authorities taking action based on their core prudential mandates and extending these to new environmental threats.
