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Article | Insurance Regulators Corner

ESG and its importance in the insurance industry

Environmental, social and governance (ESG) is comprised of non-financial factors considered in the investment decision-making and corporate strategy development processes, among others. Although not necessarily a new concept, ESG is becoming a phenomenon and focal point of corporations operating in a fiscally-responsible manner. ESG centers around socially responsible investing as a defining theme for corporate investment portfolios that can significantly impact long-term investment returns, as well as business operations that support representation within and access for people of color.

The components of ESG focus on multiple overarching factors. Environmental factors are positioned around conservation of the natural world to include climate change, natural resources, air and water pollution, and environmental opportunities. Social factors consider people and relationships and center around human capital, product liability, stakeholder opposition such as community relations and controversial sourcing and social opportunities. Governance establishes standards for operating a company and includes corporate governance, corporate behavior, and governance opportunities.

ESG continues to be a hot topic and stockholders and stakeholders alike have a vested interest in a corporation’s investment practices that support sustainability. It’s an expectation of consumers and employees for businesses to do more to support issues they care about.

Establishment of the Climate and Resiliency (EX) Task Force

In response to powerful and complex disruptors emerging in 2020 that amplified long-standing inequities and issues in the U.S. and worldwide – the global pandemic, widespread civil unrest, a highly contested presidential election and unconstrained climate change – the National Association of Insurance Commissioners (NAIC) established both a task force and a special committee under the Executive (EX) Committee to address ESG issues within the insurance industry, namely the Climate and Resiliency (EX) Task Force and the Special (EX) Committee on Race and Insurance.

The Climate and Resiliency (EX) Task Force (also referred to as the “task force”) was established to serve as the coordinating NAIC body for discussion and engagement on climate-related risk and resiliency issues, including dialogue among state insurance regulators, industry and other stakeholders. Managing and assessing financial risks associated with climate change became a top priority of the NAIC.

To learn more about ESG and why regulators are also becoming more concerned with the prevalence of Private Equity in insurance, watch our webinar.

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.

  • Consider how state insurance departments that opt into the insurer’s climate risk disclosure reporting requirement review the information received.
  • Evaluate financial regulatory approaches to climate risk and resiliency in coordination with other relevant committees, task forces and working groups, such as the International Insurance Relations (G) Committee, the Property & Casualty Insurance (C) Committee, the Financial Condition (E) Committee, and the Financial Stability (EX) Task Force. Evaluations include the use of modeling, how rating agencies incorporate climate risk into their analysis and governance, potential solvency impact, and development of climate risk-related disclosures, stress testing and scenario modeling.
  • Consider innovative insurer solutions to climate risk and resiliency including evaluating application of technology and innovation to mitigate natural disasters and products designed to mitigate, manage and close the protection gap.
  • Identify adaptation, resilience and mitigation issues and solutions related to the insurance industry.
  • Consider pre-disaster mitigation and resiliency and the role of state insurance regulators in resiliency.
  • Engage with the Center for Insurance Policy and Research (CIPR) Catastrophe Modeling Center of Excellence (COE) regarding climate-related risk and mitigation research and analysis.
ESG in the insurance industry

The Special (EX) Committee on Race and Insurance serves as the NAIC’s coordinating body on identifying issues related to (1) race, diversity and inclusion within the insurance sector, (2) race, diversity and inclusion in access to the insurance sector and insurance products and (3) practices within the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups.

  • Serve the NAIC in accomplishing the mission of the committee
  • Coordinate with existing committees, task forces and working groups such as the Innovation, Cybersecurity, and Technology (H) Committee, Big Data and Artificial Intelligence (H) Working Group and the Casualty Actuarial and Statistical (C) Task Force and encourage those groups to continue their work on issues affecting people of color and/or historically underrepresented groups, particularly in predictive modeling, price algorithms and artificial intelligence.
  • Receive updates on recommendations on action steps state insurance regulators and companies can take to improve industry the level of diversity and inclusion in the industry.
  • In coordination with the Executive (EX) Committee, receive reports on NAIC diversity, equity and inclusion (DE&I) efforts. Serve as the coordinating body to state requests for assistance from the NAIC related to DE&I efforts.
  • Receive reports from the Member Diversity Leaders Forum concerning best practices among state insurance departments on DE&I efforts.
  • Continue research and analysis of insurance, legal and regulatory approaches to addressing unfair discrimination, disparate treatment, proxy discrimination and disparate impact in underwriting variables and data. The impact of life insurance underwriting on traditionally underserved populations, considering the relationship between mortality risk and disparate impact.
  • Develop analytical and regulatory tools to assist state insurance regulators in defining, identifying and addressing unfair discrimination in property and casualty (P&C) insurance, including issues related to rating and underwriting variables, such as socioeconomic variables and criminal history, including proxy variables for race, correlation versus causation – including discussion of spurious correlation and rational explanation, potential bias in underlying data and proper use of third-party data.
  • Consider enhanced data reporting and record-keeping requirements across product lines to identify race and other sociodemographic factors of the insured, including consideration of legal and privacy concerns. Consider a data call to identify insurance producer resources available and products sold in specific ZIP codes to identify barriers to access.
  • Continue research and analysis related to insurance access and affordability issues.

On March 21, 2022, the task force adopted the redesigned NAIC Climate Risk Disclosure Survey. The survey is a voluntary risk management tool for state insurance regulators to request from insurers on an annual basis a non-confidential disclosure of each insurer’s assessment and management of their climate-related risks. The revised survey incorporates best practices that build on four core elements – governance, strategy, risk management, metrics and targets – of the task force on Climate-Related Financial Disclosure (TCFD), adopting an aligned framework for U.S. insurers to report on climate risks. For 2023, the task force added a charge to consider how state insurance departments that opt into the insurer’s climate risk disclosure reporting requirement review the information received. The California Department of Insurance has established a database of insurer responses to the NAIC Climate Risk Disclosure Survey results on their website.

During the NAIC 2023 spring national meeting, the Climate and Resiliency (EX) Task Force received updates from solvency workstreams on several initiatives. Referrals were sent to three different Financial Condition (E) Committee working groups to propose enhancements to existing financial solvency tools for monitoring climate-related risks, focusing on climate scenario analysis. In addition, the International Association of Insurance Supervisors (IAIS) presented its approach to assess and review climate issues related to enterprise risk management and macroprudential supervision.

On Dec. 14, 2022, the Special (EX) Committee on Race and Insurance adopted proposed recommended actions from workstream #1 urging insurers to develop and implement strategies adapted to recruit and retain talent at all organizational levels that are representative of customers and communities served. Collaborating with insurance trade associations to develop materials for members, sharing DE&I resources and best practices and assessing DE&I efforts at all organizational levels by the insurance industry and insurance regulators recommendations were adopted. The NAIC has since started DE&I leadership breakfast meetings at national meetings and created DE&I coursework. The Foundations of Diversity, Equity and Inclusion for Regulators course piloted in Feb. 2023 and is now available to all state insurance regulators through the NAIC Education and Training Department.

Sustainability Accounting Standards Board (SASB)

The ESG disclosure regulation landscape continues to develop and evolve. It’s important to understand the standards and frameworks that influence sustainability information companies disclose. There are several core organizations that have unique roles and/or a specialized focus, such as the Sustainability Accounting Standards Board (SASB), that issues ESG standards and framework guidance for voluntary sustainability disclosure. SASB assists companies in disclosing financial material, decision-useful and cost-effective sustainability information to investors. The standards are a set of specific, replicable and highly detailed guidance for what should be disclosed and make frameworks actionable. A framework is a set of concepts and principles for how information is structured and prepared, as well as what topics are covered. Standard frameworks promote consistency and enable high-quality disclosure.

The primary objective of the SASB standards is to establish and maintain industry-specific standards that assist companies in disclosing financial material, decision-useful and cost-effective sustainability information to investors. SASB identifies a subset of standards for ESG issues related to financial performance in over 77 industries. SASB standards include disclosure topics, accounting and activity metrics, and technical protocols.

Financial performance disclosures alone don’t provide a holistic view of the ability to create enterprise value. Sustainability disclosures are designed to provide decision-useful information in a manner that’s accurate and objective that allows investors and stakeholders to understand how management decisions impact performance in the short- and long-term.

As ESG sustainability reports are reviewed, it’s important to review and compare disclosures against guidance and model regulations. ESG regulation, standards and frameworks are continuously emerging so it’s important to become familiar with the standards and frameworks in order to prepare to review, monitor and evaluate ESG sustainability disclosures. For reference, SASB’s Sustainability Accounting Standards Board prepares individual guides for insurance sustainability disclosures that can be accessed on their website.

The establishment of the task force and special committee and assigning the specific charges and commitments by the NAIC demonstrated the significance of ESG issues within the insurance industry. Achievement of charges and objectives of the task force and special committee are demonstrated by the development of disclosures, enhanced regulatory monitoring, industry collaborations and actionable recommendations.

It is important for insurers to understand:

  • In what ways has your state insurance department integrated managing ESG risks into the analysis of the investment portfolio, strategies, and corporate governance?
  • How has your state incorporated review of ESG standards and frameworks to assess the adequacy of disclosures?
  • In what ways have other companies regulated by your domiciliary state been proactive in identifying, assessing, and mitigating ESG risks within their insurance operations?

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.

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