Sharply rising ESG risks to pose challenges for insurers once pandemic-era markets & macro abate, warns EU regulator

ESG (Environmental, Social, and Governance) related risks, albeit still muted today, have risen to become the fastest rising risk category for the European insurance sector in the eyes of its regulators, a survey of EU national regulators has shown.

ESG risks carry the "highest expected increase in materiality over the coming 12 months," having surpassed digitisation and credit risks for the title since the spring 2021 survey, the European insurance regulatory agency EIOPA said in its December 2021 Financial Stability Report.

"The increasing intensity and frequency of excessive weather circumstances is expected to be challenging insurers and IORPs," authors noted.

"The main risk driver remains climate transition risk, as following the ongoing transition towards green and more sustainable assets, insurers and IORPs highly exposed to carbon-based assets may lose value in their investment portfolios."

Unsurprisingly, ESG risks are also the risk category where regulators feel the least adequate mitigation steps have been taken to date.

That run up in expected materiality hasn't yet placed ESG risks high on the list of concerns in the here and now. Macro, market and credit risks still dominate regulator assessments of risk probability and impact given lingering glitches with the economic recovery and eventual removal of fiscal and monetary stimulus.

For the Autumn 2021 survey, market risks are now the top fear, given worries about valuations and the impact of high inflation or monetary tightening.

Macro and credit worries have eased slightly as the recovery has taken root. And macro risks, despite an uneven recovery, inflation and supply chain problems, are the only risk category amongst ten said likely to abate over the coming period, the survey showed.

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