On account of its position as a danger supervisor, insurer and investor, the insurance coverage trade performs an vital position in guaranteeing the profitable transition to a low carbon financial system and preventing local weather change.
Worldwide, insurers have taken into consideration the rising prices of local weather change. Two of the most important property insurers in the USA, Allstate and State Farm, have stopped promoting new property insurance coverage in California, citing the chance of pure disasters resembling wildfires. In the meantime in Malaysia, the devastating floods that occurred in 2021 dropped at mild questions of under-insured property and motor autos.
Insurers in Malaysia are adjusting their underwriting and funding methods, working with companions and key stakeholders to transition their insurance coverage and reinsurance underwriting portfolios to satisfy greenhouse gasoline emission targets in step with the Paris Local weather Settlement.
Malaysian regulators have additionally been a key driver in encouraging the combination of environmental, social and governance (ESG) requirements into insurers’ operations and reporting. In 2019, Financial institution Negara Malaysia issued the Local weather Change and Precept-based Taxonomy (CCPT) to facilitate monetary establishments in assessing and classifying local weather associated exposures to assist danger assessments.
This text appears to be like at how ESG has influenced the methods of two Malaysian insurers: Etiqa Malaysia and Malaysian Re.
Case Research 1: Etiqa
Etiqa, which is a part of the Maybank Group, is an insurance coverage and takaful supplier with operations throughout the Asean area. It provides life and normal insurance coverage insurance policies in addition to household and normal takaful plans.
In March 2023, Etiqa turned the first insurer in Malaysia to signal on to the United Nations’ (UN) Rules for Sustainable Insurance coverage (PSI). As such, the insurer has included the UN’s 4 ideas for sustainable insurance coverage, which embrace embedding ESG points in decision-making, working with purchasers and companions to lift ESG consciousness, selling widespread motion on ESG points and usually making public disclosures of their progress on the ideas.
Q&A with chief technique officer, Chris Eng
On this interview, the chief technique officer of Etiqa Insurance coverage & Takaful, Chris Eng, shares the ESG dangers confronted by insurance coverage corporations in Malaysia and the way ESG has influenced Etiqa’s underwriting and enterprise methods.
Chris Eng, chief technique officer, Etiqa Insurance coverage & Takaful. Picture: Etiqa
What are the important thing ESG dangers confronted by the insurance coverage trade in Malaysia? How do you see these dangers evolving sooner or later?
There are two principal ESG-related dangers – bodily danger and transition danger. Bodily dangers usually have an effect on an organization’s personal belongings, and embrace local weather change impacts resembling excessive climate occasions, or well being considerations resulting from air pollution or mosquito-borne ailments. Insurers would take note of most of these dangers when underwriting insurance coverage for such belongings or corporations.
Transition dangers, in the meantime, are the dangers associated to local weather adaption and mitigation. For instance, if we proceed to insure coal-fired energy vegetation or put money into main polluting industries, we as insurers might face a reputational backlash as a result of we’re seen as not doing our half to fight local weather change. This might result in a possible boycott of our services and products. We may additionally face difficulties in hiring and be penalised by regulators.
In the previous couple of years, regulators resembling Financial institution Negara Malaysia and institutional buyers just like the Workers Provident Fund have determined to cut back or chorus from investing in non-ESG compliant corporations. Though Etiqa shouldn’t be a listed insurer, we’re nonetheless affected as a result of we take part out there.
Our funding revenue can be affected as a result of we put money into belongings which can be uncovered to worldwide buyers, who’re keen to stroll away from corporations with out local weather insurance policies. Normal consciousness in Malaysia about sustainability is decrease than in Europe or the US.
As we transition to a low carbon financial system, how does Etiqa understand fossil fuel-based belongings within the coal and oil & gasoline trade? Do you foresee dangers of stranded belongings?
As a Malaysian majority-owned insurer, we now have to be aligned with the federal government’s insurance policies in terms of belongings in Malaysia. We’re dedicated to no new coal energy plant protection. Nonetheless, I don’t consider the world can rid itself of the oil and gasoline trade within the subsequent 30 years, so there’s nonetheless room for it, particularly for power safety and stability.
We’re cognisant of the chance of stranded belongings and monitor them carefully however we’re not turning away from them now. We proceed to be invested in equities and bonds linked to the oil and gasoline trade, and to a a lot lesser diploma the coal trade. The great factor is that lots of the companions we insure resembling Tenaga Nasional and Petronas have made their very own sustainability commitments, so we work with them to maneuver ahead in our sustainability journey.
Etiqa just lately turned the primary Malaysian insurer to be signatory to the UN Rules for Sustainable Insurance coverage. How has ESG influenced the methods of Etiqa?
We began our sustainability journey in 2018 by creating consciousness amongst inside employees, earlier than we established sustainability governance frameworks. This included organising a value-based intermediation and sustainability steering committee that meets each month. We then decided our carbon footprint baseline and focused funding portfolio earlier than executing our methods.
Etiqa goals for all our fairness investments to satisfy inside ESG necessities by 2025. We’re going to step by step implement a technique the place we solely put money into areas with low and medium ESG dangers, in order that has a big effect on our technique as a result of we solely need to put our cash into belongings or corporations which can be sustainable. We additionally look out for brand spanking new sustainability-linked services and products that we will provide.
How is Etiqa adapting its underwriting mannequin to be inclusive of ESG?
We need to set up a baseline of our underwriting portfolio and take a look at what elements of the portfolio are inexperienced – which incorporates photo voltaic panels and hydro dams for instance – and what elements of it are brown, resembling coal fired energy vegetation. We need to enhance the inexperienced portion of the portfolio and scale back the brown portion.
From an environmental perspective, we periodically monitor our flood protection take-up fee and advise to our prospects in flood-prone areas to purchase protection. We proceed to underwrite them on this case, monitor the scenario and alter our premiums to consider flood dangers.
Case Research 2: Malaysian Reinsurance Berhad
Malaysian Reinsurance Berhad (Malaysian Re), a wholly-owned subsidiary of MNRB Holdings Berhad, is the most important nationwide reinsurer by asset and gross premium in Southeast Asia. It underwrites all courses of normal reinsurance and participates within the household and normal retakaful companies, with operations throughout Asia and within the Center East.
Malaysian Re has undertaken a number of sustainable initiatives. For instance, the organisation is a member of the Asean Reinsurance Working Committee and was additionally appointed by PIAM (Normal Insurance coverage Affiliation of Malaysia) to be the fund administrator for the CSR Flood Reduction Fund.
Reinsurers resembling Malaysian Re present insurance coverage to insurance coverage corporations. By buying dangers from reinsurers, insurance coverage corporations are capable of unfold out their dangers and permits them to subsequently tackle extra danger and do extra enterprise.
Q&A with president and CEO, Ahmad Noor Azhari Abdul Manaf
We spoke with president and CEO of Malaysian Re, Ahmad Noor Azhari Abdul Manaf, to search out out extra in regards to the position of ESG within the firm’s enterprise methods.
Ahmad Noor Azhari Abdul Manaf, president and CEO of Malaysian Re. Picture: Malaysian Re
What are the important thing ESG dangers confronted by the insurance coverage trade in Malaysia? How do you see these dangers evolving sooner or later?
The “E” (surroundings) in ESG is a key publicity insurers face. Within the final decade, we now have seen modifications in climate patterns and temperature worldwide that brought on a rise in pure catastrophic losses. Floods are a significant environmental danger that Malaysian insurers face, with the 2021 floods being worse as a result of it hit the Klang Valley along with different states. These floods additionally affected the commercial areas and brought on RM 2.5 billion in insured loss general, a magnitude we now have not seen earlier than.
One other lesson we discovered in the course of the flood was that there was insufficient motor insurance coverage in opposition to flooding. Folks have to have a mindset that insurance coverage is for cover and see it as an funding – it isn’t solely about prices.
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Managing Flood Dangers
Each Etiqa and Malaysian RE have groups that monitor flood dangers and measures their publicity to potential flood-related losses. Malaysian RE is working with its purchasers, that are insurance coverage corporations, to get extra granular information. In the meantime, Etiqa’s danger workforce retains a watch on incessantly flooded areas, and have made efforts to geo-tag the corporate’s insured belongings.Nonetheless, as individuals who keep in flood-prone areas are prone to sustaining greater flood-related losses, insurers have needed to alter their premiums. “We definitely don’t need to flip folks away from having flood insurance coverage, however on the identical time a few of these premiums might should be adjusted to issue within the elevated dangers in years to come back,” stated Chris Eng. Consequently, the federal government might have to supply programmes just like motor-insurance, wherein an association-run insurer acts because the final resort for folks unable to safe industrial insurance coverage.
Ahmad Noor Azhari Abdul Manaf stated that Malaysian RE had lowered their nationwide disaster occasions protection within the wake of the 2021 floods and that pricing of insurance coverage merchandise might should be elevated. “We even have to teach the insurance coverage trade in Malaysia that they should cost the right pricing to their purchasers,” he stated.
Buildings partially submerged in the course of the floods of December 2021 in Malaysia. Picture: ©Muhammad Faiz Zaki (123RF.com)
How has ESG influenced the methods of Malaysian RE?
ESG has a major affect on Malaysian Re. We have to retrain our underwriters to be aware of the dangers that perhaps poisonous to us. For instance, we now have dedicated to lowering our insurance coverage publicity to coal and different fossil fuels at a gradual tempo over the subsequent three to 4 years.
As an insurance coverage supplier, we additionally should information others in direction of clear power as a substitute of abruptly cancelling [fossil fuel insurance]. There’s a transition interval for doing this. We’d like to consider which segments of society nonetheless require fossil gasoline power and step by step convey them onboard inexperienced power.
Environmental points have additionally affected the diversification of our enterprise. Within the reinsurance line of enterprise, we have to unfold our dangers throughout each worldwide and home companies. However we even have to know what dangers we’re uncovered to when coming into a brand new market. For instance, there are dangers of bush fires in Australia, so we should practice our underwriters to observe these dangers.
As we transition to a low-carbon financial system, how does Malaysian RE understand fossil fuel-based belongings within the coal and oil & gasoline trade? Do you foresee dangers of stranded belongings?
The chance of stranded belongings might not be instant, however they may influence us sooner or later. Nonetheless, I consider that gamers within the oil and gasoline trade are altering, too. Petronas, for instance, is investing in inexperienced know-how.
There are nonetheless excessive prices related to transitioning to renewable power and points with storing extra renewable power. However we count on to see extra investments in clear power worldwide.
The insurance coverage trade performs an vital position on this power transition by giving assurance to areas or tasks that banks really feel uncomfortable assuring, resembling insuring loans [for green energy projects].
How is Malaysian RE adapting its underwriting mannequin to be inclusive of ESG?
We’ve got a Sustainability Working Group (SWG) which discusses the way to incorporate ESG into our underwriting tips, an space that we’re specializing in closely. We even have a workforce that appears at offering options for underserved and low-income communities, particularly in areas resembling meals safety and flood safety.
This text was first revealed on Bursa Maintain, Bursa Malaysia’s one-stop information hub that promotes and helps improvement in sustainability, company governance and accountable funding amongst public-listed corporations.
