Ratings agency AM Best has released a new Best’s Special Report examining the impact of Environmental, Social and Governance (ESG) factors on its rating actions, showing that ESG was a key factor in 13% of global rating actions during the April 2020-March 2021 review period.
Of these, 69% were negative rating actions, and 31% were positive.
More broadly, AM Best identified the ESG factors that were determined to be primary drivers of rating actions.
Other key takeaways include:
- Property/casualty companies predominantly accounted for 85% of the rating actions driven primarily by ESG factors, with life/health companies making up the remaining 15%.
- Nearly three quarters of the ESG-driven rating actions were on companies domiciled in the United States.
- The vast majority of the ESG-related rating actions were due to weather-related events and governance. In some cases, more than one ESG factor was a driver for the rating actions.
According to the rating agency, environmental factors are considered a severe threat to the balance sheet strength and operating performance of some insurers due to the potentially significant, rapid, and unexpected impact of weather-related losses. In the context of environmental risk, AM Best generally classifies weather-related events such as hurricanes, cyclones, wildfires, droughts, storms, and floods as events affected by climate risk.
For social factors, AM Best focuses primarily on changes in social behaviour and demographics, which offer both challenges and opportunities for insurers. It says that insurers that are attuned to customer needs are innovative and have access to data will be more successful in defending their market position. Alternatively, an insurer’s business profile may be negatively affected following an ESG-related scandal such as a data breach, which has the potential to materially damage the company’s reputation and brand.
Governance factors, it adds, are explicitly considered under the ERM building block for both financial and non-financial factors. AM Best’s evaluation of an insurer’s risk management framework takes a holistic view of the insurer’s risk management system and its associated strategies, processes, tools, and owners.
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