Environmental, social and governance (ESG) factors will not affect pricing in ILS transactions in a direct way at least for the time being, but they may influence the overall view of risk, an ESG-focused panel at Trading Risk’s London ILS conference said.
The panellists agreed that in general, they would expect a risk with underlying positive ESG credentials naturally to be a good quality risk, in part because it would likely be sustainable and resilient.
However, this might not necessarily translate into keener pricing because several conflicting influences are at play.
Maria Rapin, who took over as CEO at Nephila Climate in July, said: “When you incorporate this new ESG dimension, it’s another lens to look at the risk analysis and pricing. There may be a differential in capital or capacity – less capacity available for things that aren’t positive, or it could be more capacity for things that are positive. I don’t know that it changes the equation in different ways.”
The ILS London panel said factoring ESG credentials into judgements about pricing was a complex process, with investors also generally having their own specific goals.
When you incorporate this new ESG dimension, it’s another lens to look at the risk analysis and pricing
Rhodri Morris, associate director of ILS analytics at Twelve Capital, said: “There are obviously green transactions like the World Bank cat bonds, which might be subject to pricing pressure, because if people want ESG, that might be a good thing to have in their portfolio.
He added: “On the risk element, I agree it should be already baked in. But the forward-looking sustainability piece is maybe where it becomes greyer, because ESG means different things to different people. Fund A might be leaning towards ‘S’, and Fund B towards ‘E’, so there is not necessarily the price competition you might expect.”
Discussing potential reinsurance transactions by the World Bank or for developing world insurance purposes, panel chair and Hiscox ILS principal Ben Fox said that despite their ESG-friendly applications, such deals still had to meet certain other standards.
“There's got to be a level of data transparency...the transaction has still got to be well structured and stand up on its own merits.”
Others on the panel pointed out that ESG-positive transactions had seen downward pricing pressure because investors sought after them.
Adele Gale, head of ILS at Robus Group, said: “We have already seen lower yields on the World Bank cat bonds, or structures set up with specific ESG credentials. It has been borne out in what’s happened and what capital is prepared to take in terms of return, to tick that box.”
Guernsey-domiciled Robus is among participants in that jurisdiction that have been developing a green kitemark for ILS transactions.
Guernsey International Insurance Association awarded its first ESG accreditation to the Red Cross-sponsored Durant Re IC deal earlier this month.
