Environmental, Social and Governance (ESG) Principles and the Insurance Industry.
Environmental, Social and Governance (ESG) Principles and the Insurance Industry: European
Union (EU) Insurers Must Now Consider and Comply with Additional Sustainability Risk Requirements.
Vol. 37 - September 2022 | ©2022 by Vidal, Nieves & Bauzá, LLC. All rights reserved.
Recently, on August 2, 2022, the European Commission’s (EC) regulations requiring that European insurers and reinsurers incorporate sustainability risks as part of their
governance polices took effect. The EC regulations in question, -- Commission Delegated Regulations (EU) 2021/1256 and 2021/1257--, amend the EU’s Solvency II framework, and are consistent the EU’s goal of prioritizing sustainability considerations within the financial systems generally.
The EC regulations require regulated entities in insurance to consider and account for sustainability risk and factors across several key areas which potentially impact the operational results of insurance companies.
The regulations define “sustainability risks” as environmental, social and governance events or conditions that, in if occurrence, could cause an actual or potential impact on the value of the
investment or on the value of the liability. Importantly, the regulations also add a new definition for “sustainability factors” which is centered on environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
Some of the more salient changes introduced by the EC regulations include the need for insurers and reinsurers to specifically incorporate sustainability risks as a part of their general risk management policies’ framework. As a result, insurer and reinsurer’s reserves and underwriting policies must now consider the risk of loss or of an adverse change in the value of their insurance obligations resulting from, among other risks, sustainability risks. They also include the need to consider sustainability risks as part of any actuarial opinion issued with respect to an insurer.
Further, the investment policies of insurers and reinsurers must now account for, evaluate and manage sustainability risks identified in their respective investment portfolios. In addition, regulated insurers will also now need to take into account the so-called “sustainability preference” of their clients in respect to the products offered to such clients. Insurers and reinsurers will need to take into consideration environmental and climate risks as a
part of the overall process through which investments are managed by such regulated entities, generally. In doing so, they are required to consider sustainability risks following the principle of the prudent person or investor.
These developments centered on the climate-related and other sustainability risks faced by insurers at the European front, are certainly consistent with those being observed with respect to the regulation of insurers in the U.S. as well. Thus, the National Association of Insurance Commissioners (NAIC) Climate Risk & Resiliency Taskforce developed a survey adopted this year which is aligned with the International Task Force on Climate-Related Financial Disclosures (TCFD), and which has been voluntarily adopted by fifteen (15) insurance departments in the U.S.
The TCFD survey has the purpose of enhancing transparency in the manner in which insurance companies manage climate-related risks generally, and to incorporate international best practices in this important insurance risk area. Insurers in such fifteen states, -- which constitute roughly eighty (80) percent of the U.S. insurance market,-- will need to file and disclose climate-related financial disclosures through such TCFD survey (or the original NAIC Climate Risk Disclosure Survey) by November, 2022.
In Puerto Rico, the Office of the Commissioner of Insurance, our insurance regulator, adopted the TCFD survey and is requiring that insurers and HMOs having a volume of written premiums of 100 million or more during 2021 file the TCFD survey by November 30, 2022 (next year’s filing deadline will be on August 31, 2023).
Should you or your company have any questions or interest, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, a corporate law firm with special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and health law and insurance practices.