Environmental risks a growing credit driver for Chinese insurers

Environmental risks are becoming an increasingly important credit driver for Chinese insurers as their exposure to climate-related catastrophic events and decarbonisation policies grow.

“Rising economic losses from climate-driven natural disasters are making Chinese property and casualty (P&C) insurers’ earnings and capitalisation more volatile as they fill growing demand for insurance protection. Such losses tend to be unpredictable and prone to mispricing risks because of climate change,” says Kelvin Kwok, a Moody’s Analyst.

Meanwhile, faster carbon transition to meet China’s climate goals raises impairment risks for life and P&C insurers’ investments in carbon-intensive industries, despite the relatively modest direct bond and equity investments that most rated insurers have in these sectors.

But the policy directive to grow carbon-friendly businesses will spur insurers’ investments in renewable energy and related infrastructure. The rating agency expects green investments made fully in line with government policy will entail lower credit risks because of government support.

A few major Chinese insurers are adopting global best practices for environmental risk management in their business strategies and operations. But much of the industry still lags their global peers on this.

Under these circumstances, individual insurers’ efforts to manage environmental risks, such as stronger engagement with policyholders on loss prevention and incorporating global best practices on responsible investing and disclosures, will help mitigate negative pressure on their credit profile.