AM Best Releases FAQ on ESG
On November 22, 2021, AM Best released its ESG and Insurance Credit Ratings: Frequently Asked Questions commentary. AM Best also recorded a webinar on the topic, which can be accessed on its website. AM Best presented this information to provide more transparency in how it views environmental, social, and governance (ESG) factors in insurance credit ratings.
AM Best announced it is adding a dedicated ESG section to its credit reports under the enterprise risk management (ERM) section. The ESG section will be added on a rolling basis over the next year. This ESG section will be focused on how ESG factors affect financial strength.
For property and casualty insurers, AM Best anticipates factors related to climate risk and governance to have the greatest effect on financial strength over the near term, while environmental liability and certain transition risks are expected to be more relevant over time. AM Best stated it considers a rating factor relevant if it believes there will be an impact on financial strength within AM Best’s time horizon, which is typically 36 months.
For life insurers, changing demographics is expected by AM Best to have an effect on financial strength, since changing demographics may alter demand for different products and result in changes to mortality and morbidity trends. Because of the size and long duration of investment portfolios that life insurers typically hold, asset exposure to climate-related transition risk may be relevant.
Social inflation is expected by AM Best to affect financial strength for casualty insurers as it has resulted in some substantial losses in recent years. Social inflation is the rise in the cost of claims caused by higher court awards and legislated rises in claims payments driven by changing societal behavior.
AM Best has emphasized that a strong ERM framework is important in helping an insurer handle risk exposure by appropriately modeling risks and having strong governance internal controls in place.
See this previous BKD Thoughtware® article for more information about why insurance companies need to consider ESG, including how ESG factors impact AM Best’s credit ratings.
The financial impacts of ESG risks are unique to each insurer as they vary by an insurer’s business line, geographic area, and reinsurance protection. Reach out to your BKD Trusted Advisor™ or submit the Contact Us form below for more information or assistance with navigating ESG and improving your organization’s ERM framework.