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Insurance chain transparency key to lift ESG relevance: panel

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Jillian Williams of Leadenhall Capital Partners was one of the panellists

Panellists at Trading Risk’s ILS Week event said a greater understanding of risks being written could boost ILS credentials in the eyes of investors interested in environmental, social and corporate governance affairs (ESG).

The distance between reinsurers and the risks they are covering has been cited as a source of opacity, and something that makes it hard for ILS managers to steer towards ESG goals.

Panellists in the final discussion of ILS Week reflected this view, saying that increasing transparency in insurance risk transfer chains would be one of the most important steps to elevating the asset class’s relevance for ESG investors.

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Maria Rapin, CEO of Nephila Climate, said that investors were starting to ask more questions of the issuers or sponsors of catastrophe bonds, and that a baseline could be developed in that market.

The challenge for the ILS market is that investors don’t always know quite what they are insuring because they are not the direct underwriters.

Dirk Schmelzer, partner and senior portfolio manager at Plenum, said this was becoming a greater problem as ethically minded investors were increasingly enquiring about asset supply chains.

“Our investors are asking these questions and, without us being able to provide the transparency of the whole ESG chain it breaks apart, and we need to make sure that doesn’t happen,” he said.

The panel also said that developing models which account for the risk of climate change is not a simple answer to environmental concerns around ESG.

Jillian Williams, CUO and head of ESG at Leadenhall Capital Partners, reminded the audience that models could be wrong and emphasised the value of managers understanding the uncertainties around global warming.

“You don’t want to get to a point where you’re just clicking [a model adjustment] for an answer but discussing some of those uncertainties, I think is a step in the right direction,” she said.

A climate change model would give investors “an uncertainty envelope” to base pricing decisions on, Schmelzer added, but it does not impact other factors that go into ESG business decisions.

Another challenge for ILS managers is that ESG frameworks are typically designed for equity investors or asset owners, Rapin noted.

This can cause practical problems, for example, with calculating CO2 emissions, as a risk transfer deal is not a direct emitter, noted Williams.

This means that collaboration is required across ILS funds to set standards for what constitutes ESG compliance in insurance, Schmelzer said.

Failure to do this could result in the industry being discounted completely by conscientious investors, he argued.

“Getting an understanding that insurance can promote ESG goals and does so, and also the role that ILS plays, needs collaboration from the industry so that we don’t fall into a regulatory vacuum where ILS and reinsurance and insurance is not considered to be an ESG compliant activity,” he said.

Replays of the ESG discussion and other panels hosted during ILS Week are available for the next 30 days, you can register free online to watch.

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