Environmental and social factors are a growing credit risk for insurers, according to a new report from Moody’s Investors Service.
Moody’s analysts note that these factors have become increasingly significant due to shifting demographics and the changing climate. Governmental factors have been an additional longtime concern for insurers, but evolving regulations and policy changes have made these more important, too, according to the report.
The impact of climate change is especially a factor for insurers to watch, the analysts said, as it’s linked to high-risk events like natural disasters.
“Climate change in particular gives rise to greater uncertainty for insurers, both with respect to expectations for frequency and severity of natural catastrophes, and exposure to carbon transition risk through their investment portfolios and the possibility of stranded assets,” Brandan Holmes, vice president and senior credit officer at Moody’s, said in a statement.
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The Moody’s report identifies five categories of environmental risks that could have the greatest impact on insurers’ credit, with some impacting certain sectors more than others—natural and man-made hazards, for example, are the highest risk for property insurers compared to other types of insurance.
The categories are:
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Air pollution
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Soil and water pollution, land-use restrictions
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Carbon regulations
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Water shortages
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Natural and man-made hazards
Adding in the impact of climate change on these categories is complex, the analysts wrote, as the science is still developing and the climate is more unpredictable than is typical in other factors for risk analysis.
“It might be difficult to appropriately price risk in the event of increasing volatility, and therefore uncertainty, in frequency and severity trends,” the analysts wrote.
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The report also includes several key social and demographic factors that have credit implications for insurers. An aging population, growing urbanization and rising wealth offer insurers both “opportunities and challenges,” Moody’s said.
The growing number of people aging into Medicare or reaching middle age increases demand for coverage, but changing consumer demands offer insurers the chance to market new products or update benefit design to better suit the needs of these seniors, according to the report.
Politics—such as growing calls from some for a single-payer health system—are also significant credit risks, the analysts noted.
“Such scenarios are highly unlikely in current circumstances, but with a potential change in the political guard in 2020, a move in the direction of a single payer system is possible, and would likely be negative for the sector,” they wrote.