Asset Management & ESG
ESG Under Insurance Regulatory Spotlight
U.S. and U.K. environmental, social and governance oversight raises litigation challenges for insurers.
- John Weber
- May 2022
As environmental, social and governance, or ESG, has been growing in prominence among insurers in recent years, so, too, has it become a higher priority for regulators. In the European Union, companies must comply with increasing obligations related to ESG. In the U.S., the Securities and Exchange Commission recently proposed rulemaking in two ESG priority areas, cyber and climate.
Panelists Eric Dinallo, partner and chair of the insurance regulatory practice at Debevoise & Plimpton and former New York superintendent of insurance; Kristen Sullivan, U.S. Sustainability and ESG Services leader and Global Audit & Assurance Climate and Sustainability Services leader with Deloitte; and Rakhi Kumar, senior vice president, Sustainability Solutions at Liberty Mutual, examined the issue of ESG and regulation with AM Best TV. Following is an edited transcript of the panel's discussion.
What are the regulatory challenges of ESG?
Dinallo: It's about how far and how fast. The biggest issue for the regulators is this is a huge area for companies to get their arms around, both the environmental side, the social side and of course the governance side.
You could become somewhat of a disclosure regime, but the question is, a disclosure regime to whom? Just the regulators, or is it publicly available? You could come up with metrics and then you could have that followed on by examinations, as New York has implied they intend to do. There's that, all tied into some mandate or some jurisdiction. What is the jurisdiction for it? Is it under ORSA [Own Risk and Solvency Assessment]? Is it under ERM [enterprise risk management]? Is there a solvency regime responsibility attached to it?
Then you've got [these questions]: What do you go for? Is it the assets and the investments side? Is the underwriting side scrutinizing who is underwritten or who is reinsured? Finally, there's the patchwork problem. The U.S. system is a patchwork. Now with the SEC and foreign regulators being so engaged, the regulators here in the U.S. do have to be aware that it's an important time for the National Association of Insurance Commissioners to try to put a united foot forward on this.
[The ESG challenges facing insurers] “from an immediate need perspective or immediate challenge perspective, it’s getting that climate data and tools that are needed to get actionable information to inform insurance companies as to how they should transition.”
Do ESG issues pose the potential for litigation?
Dinallo: If you put in rules that are publicly known, you certainly do increase the chances of litigation. Because there have been some cases recently that have been brought that are non-enforcement cases. They've been class actions, etc. that go to the argument of greenwashing. “You said you were going to do this and now you're not as green, we've learned.” Facebook, for instance, just confronted one of these. The argument there is, “It was aspirational. We did our best. We said what we said. We meant it but we didn't get there.”
If you start having rules and metrics that are put down by the regulators, then you go to a world where it's harder to get a motion to dismiss, because now you've got something where a judge says, “It's not just aspirational. You're going to get measured against this and we're going to also look at your financial statements versus your sustainability statements and are they the same?” You could get into a world that is much more litigious but also more likely to survive a motion to dismiss.
How should insurers be working with regulators?
Dinallo: I try to encourage my clients to go in and have conversations with the regulators. You don't want to start a relationship with an ask.
One reason people use trade associations, or they have law firms or consultants call on a no-names basis, is this issue about getting off of market. In other words, if you go in and you have a conversation with the regulator and the regulator says, “Hey, we really don't think you should be using, for instance, credit scores in life insurance.” All of a sudden you go back to the mothership and have to tell the management committee, “Whoops, we can't do this. We were just told but no one else knows. Other companies don't have such a prescription yet.” That's a bad day when you're in-house at a company.
Regulators have to likewise create—I wouldn't call it a sandbox, which is more about underwriting—but they have to create an open, safe space where the companies can discuss these things.
The National Association of Insurance Commissioners formed the Climate Change and Global Warming Task Force in 2006. How have regulatory efforts surrounding ESG evolved since that time?
Sullivan: The framing of ESG as an umbrella set of considerations from a very fundamental business risk and opportunity perspective—that's what's new. These issues are business issues, business risks, business opportunities. The way in which we're seeing these areas of risk, in particular as it relates to climate, evolve and manifest—it's become very central to capital markets' decision making.
That's where investors, and now regulators, are starting to organize to put some consistency in the level of transparency that becomes essential to informing the regulators as they're delivering on their remit, as investors are looking to understand a full picture of risk profile to inform those decisions.
The emphasis and the priority in terms of what information is being used and how that's driving strategic choices within organizations is what's become much more central to the conversation.
Is there a sense of urgency on the part of regulators when it comes to ESG?
Sullivan: Absolutely. Certainly it's supported by the evidence that we're seeing emerge as we look at the World Economic Forum's global risks report and the conversation at the global level that these concerns are so central to the insurance industry in particular.
Some good examples of where we're seeing that meaningful action across different regulators include that the U.K.'s Prudential Regulation Authority has been very proactive in requiring climate stress tests by 2022. The U.S. Securities and Exchange Commission recently introduced broad proposed disclosure rulemaking to help to increase the access to timely, relevant, and decision-useful climate-related information. Clearly, a number of states within the U.S. are taking a clear leadership position as we look at California, Connecticut, and New York starting to put more definition around those expectations for U.S. insurers.
Will there be uniform ESG international standards in the insurance industry?
Sullivan: I believe so. We're already starting to see some of that coalescence around a common framework. This is relevant to the insurance industry as well as many other industries when you look at the Task Force on Climate-Related Financial Disclosures and how the framework itself can be tailored for different industries and the unique circumstances of those participants in the industries.
The NAIC Annual Climate Risk Survey that has been in place since 2010 covers a significant portion of the industry, the work that's underway to align the objectives, and the information to the Task Force on Climate-Related Financial Disclosures—we're already starting to see some progress in that area.
What are the ESG challenges facing insurers?
Kumar: From an immediate need perspective or immediate challenge perspective, it's getting the climate data and tools needed to get actionable information to inform insurance companies as to how they should transition.
There's a real gap between the desire of what we want to do with climate science and data availability, which is challenging to building real transition pathways. We're seeing that play out right now. Net Zero Asset Owners Alliance is made up of asset owners and investments who are on a different timeline when it comes to their climate transition journey than insurers. Earlier this year, they came out saying, “Oh, well, we're going to need a little bit of lag time to achieve the interim targets that we had set for ourselves because of this real gap or a disconnect between climate science and economic reality.”
Debevoise & Plimpton
What developments are you seeing around greater regulatory scrutiny of ESG?
Kumar: From a regulatory perspective, when it comes to risk discovery, regulators are asking for more stress tests just like the PRA has done. Through that process you have a conversation that's going on about the limitations of the current models and the usability of that information for regulatory purposes or any kind of monitoring purpose.
As risk discovery becomes greater there's also this realization that you can start impacting affordability and accessibility of insurance. You started seeing that with flood insurance, on affordability. If people are going to pull back, what happens if you can't get insurance to some of these markets? That conversation around accessibility and affordability and the link to risk discovery is very important.
How are you and your team navigating increased calls for ESG disclosures in 2022?
Kumar: We haven't hidden behind being a mutual and have leaned into increased disclosure and transparency. I recently put the finishing touches on our next TCFD report. It's our second year. We have done stress tests and scenario work that a lot of regulators would like. We also are in our third year of the sustainability report, and we've aligned to the Global Reporting Initiative Standards and the Sustainability Accounting Standards Board. These are these global standards that people are looking for.
There are challenges. When I came from the investment industry, one of my colleagues told me, “Insurance, we're the stepchild of the financial sector.” I laughed at it but the more I leaned in, the more I realized there's a different degree of sophistication in the insurance sector because they have been writing risks for a while. The business is different than banking or investments. And the reporting and disclosure should be, too.
AM Best TV
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