Global asset manager abrdn and Hong Kong-based financial services strategy consultancy Quinlan & Associates launched the first APAC Insurance Investment Landscape report, which explores how insurers in the APAC region are tackling – and capitalizing on – various industry-specific developments, and tries to understand the priorities in their future investment strategies. We spoke to abrdn’s Mr. Xiong Jian about what insurers are doing about ESG. By Ahmad Zaki As regulators in APAC have set out rapidly evolving expectations on ESG requirements for regional insurers, particularly focusing on environmental initiatives such as net zero and risk management strategies, insurers have been incorporating ESG considerations into their operations and investments. This was according the first APAC Insurance Investment Landscape report, produced by global asset manager abrdn and financial services strategy consultancy Quinlan & Associates. The survey findings showed that 70% of APAC insurers have either already integrated ESG into their investment strategies or are in the progress of doing so, while 50% of respondents have not yet started to integrate net zero. Data quality remains the largest integration barrier for both ESG and net zero, followed by investment management, which are the starting points of the entire integration value chain. An average of 62% of APAC insurers believe local ESG regulations will become stricter in the next three years and expectations are particularly high in Australia (77%), Malaysia (72%) and Hong Kong (69%). The report surveyed 56 senior executives across 43 insurance companies covering eight markets in APAC, including Hong Kong, Singapore, mainland China, Thailand, Taiwan, Malaysia, Australia and South Korea on six key topics ranging from regulatory adoption to ESG and net zero, to investment and hedging strategies, ILP business and external partnerships. abrdn senior insurance solutions director Xiong Jian said, “We see regulatory adoption and ESG integration as high priority focus areas for regional insurers amid the current market conditions. The key to gaining a competitive advantage for regional insurers would be to move away from a reactive, compliance-driven mindset to a proactive one, leveraging RBC, IFRS9/IFRS17 and ESG as strategic differentiation points.” Insurer strategies According to Mr. Xiong, similar to conventional investment strategy, implementation of ESG investment can be carried out at strategic asset allocation (SAA) level and underlying asset level. “At SAA level, in addition to risk and return, insurers are adding new dimensions, such as ESG scores or carbon metrics, into their SAA optimization process to create ESG/climate change-aware portfolio,” he said. At the underlying asset level, insurers have three options to exploit their ESG investment strategy: ESG/climate change-tilted index fund/ETF: This type of instrument is normally created using quantitative modelling to ensure a low tracking error with particular index, while having lower carbon emission level, higher green revenue or better ESG profile. It is the ideal option for insurers who would like to improve their ESG status or carbon emission level and at the same time maintain the current risk/return profile Thematic funds: There have been many thematic funds in the market. For example, sustainability-aware funds invest into companies which adhere to the firm’s sustainable and responsible investment approach. Another example is impact investment, which typically to address real world emission reductions and climate adaptation so as to align investments to specific climate outcomes. Segregated mandates: By setting investment guideline for the mandate, insurers can deliberately invest or avoid investing into particular companies or sectors. This form also helps insurers access to special investment opportunities, such as green bond issuance or sustainable infrastructure projects. Embedding ESG into investing strategy abrdn also provided recommendations for organizations that are just starting out. The first step is in identifying ESG risks throughout the organization, including underwriting and investment. It requires a systematic and consistent approach across an insurer’s risk management frameworks and processes, comprising elements such as risk identification, assessment, monitoring and reporting and mitigation. “First of all, to partner with creditable partners to have access to reliable qualitative and quantitative ESG information. Use that information to understand the current ESG profile,” he said. Second, to work out the ESG investment policies, clearly identify sectors the organization would like to avoid or promote investments and integrate ESG risk factors into security valuation and asset allocation process. Third, optimize investment portfolio with consideration of ESG factors. The optimization can be carried out at both asset allocation level and security selection level. At asset allocation level, an insurer should factor in the ESG impact on return/risk characteristics of the asset classes as well as add ESG as additional dimension for the optimisation. At security level, insurers can adjust the weights of securities based on ESG characteristics or invest into funds/ETFs which are tilted for ESG investment. “ESG integration is an ongoing process. Its performance needs to be constantly monitored and its process need to be closely reviewed,” he said. Outsourcing ESG integration The survey also said that insurers expressed strong demand to outsource their ESG integration efforts, investment execution, as well as hedging strategies to external partners. When considering partners, 96% of surveyed insurers believe that brand, reputation, and performance track record are very important or important factors, while independence is not a concern. This outsourcing may involve some of the following: ESG data service: Insurers partner with data providers to access to qualitative and quantitative ESG data for their internal usage, such as ESG investment, risk management and reporting. This is the most cost-efficient option for insurers to start on ESG. However, insurers need to take efforts to ensure data is standardized and comparable. Also, insurers need to work with data providers to ensure the data is constantly updated and has sufficient coverage for their activities. ESG governance policies and framework. Normally, insurers can work with consultants to establish ESG governance policies and framework for their own organizations. Such capabilities are well established, but insurers need to closely monitor the regulatory and industrial development to ensure their governance stays relevant and sufficient. ESG investment: Insurers could outsource their ESG investment management to professional investment managers. The managers can help insurers analyze impact of ESG factors on asset value, optimize investment portfolio, improve ESG profile while maintaining current risk/return objective and manage portfolio according ESG targets set by insurers. This is the fastest and most cost-efficient way for insurers to implement ESG investment strategies. But insurers need to select managers with good track record and strong capability for ESG investment. Changing regulatory landscape Insurers also believed that the regulation around ESG requirements would continue to get stricter over the next five years, with governments all around the world focusing on sustainability. “It is quite likely regulators will continue to press ESG matters from the following perspective: Insurers’ corporate governance, underwriting, investment, risk management and disclosure,” said Mr. Xiong. “The details of requirements are expected to be articulated and standardized so that the expected outcome can be well comprehended by the industrial participants and results can be fairly evaluated.”

Towards the end of last year, S&P produced an overview of the marine protection and indemnity sector that pointed to some of the major opportunities – as well as significant threats – that P&I clubs face in a post-COVID world. International Group of P&I Clubs’ Mr. Andrew Cutler shared his thoughts on the pressures affecting the sector and future prospects. By Paul McNamara Even the most cursory review will show that the marine protection and indemnity sector (P&I) sector has had a difficult few years. Towards the end of last year, S&P published a report (Global Marine Protection and Indemnity Clubs) that said, “The P&I sector has struggled to post a technical profit since financial 2016, with large claims and inadequate rates resulting in combined ratios of significantly above 100%. The ratio peaked at 117% in financial 2020, before moderating to around 108% in financial 2021. Thanks to an unusually low frequency of high-severity claims so far in 2022, the sector’s technical performance has improved materially compared to that in the past few years. We expect net combined ratios in the 105%-107% range over the next two years.” The P&I segment faces a complicated future, but one that holds the prospect of significant growth. S&P enumerated some of the factors that could help improve the sector’s operating performance including: General increases at the February 2022 renewals, with expectations of further increases at the February 2023 renewals; revised terms and conditions increasing deductibles in the event of a claim; some diversification into fixed-premium and charter lines, offsetting the P&I lines’ poor performance; and enhanced risk-management frameworks and loss-prevention programmes that should help control the sector’s technical performance in the longer term. International Group of P&I Clubs In order to get a current practitioner’s-eye view of the market, we spoke to London-headquartered International Group of P&I Clubs chair Andrew Cutler. The 12 clubs that comprise the group collectively provide marine liability cover for around 90% of the world’s ocean-going tonnage. Mr Cutler sees three main factors influence influencing the marine insurance industry on a global scale. “The first major force is the continuing move out of COVID-19 and how the world is adjusting to that,” Mr. Cutler said. “The second is how the world is adjusting to Russia’s invasion of Ukraine, the political fallout of that conflict, including the energy security debate. The third, which in part comes out of the first two, is inflationary pressures worldwide.” Profitability is another challenge facing the marine insurance sector. “It’s about pricing. To ensure that your pricing model is sustainable going forward, you need to have balanced underwriting,” Mr. Cutler said. Sustainability The issue of sustainability is rarely far from the top of the agenda and is an area that affects the marine industry profoundly. “You need to recognize what clubs do,” Mr. Cutler said. “We enable world trade. It sounds very grand, but that’s the truth of it. We are an enabler and facilitator of world trade on a massive scale. We provide unparalleled extent and range of cover for insurance to enable ship owners and operators to trade. “The most visible example of how we do that is by issuing and standing behind Blue Cards - the tickets to trade that allow ships to respond to conventions, whether it’s wreck removal, pollution and so forth. That financial stability and cover is a bedrock of world trade in the context of sustainability,” he said. There is also an impact on the investments managed by marine insurance businesses. “There’s also ESG at the forefront of considerations as to where you hold your investments,” said Mr. Cutler. “All clubs will have capital underpinning them, which they will be investing. How that capital is invested will also have sustainability considerations. And I’m sure that all the clubs are looking at that quite carefully, balancing their role as insurers with their sustainability hats on.” Returning to profitability How can the sector move from a position where it is sustainable from a profitability point of view? “You need to separate the economics a little bit,” Mr. Cutler said. “There’s no denying that for the clubs there is insufficient premium coming in to cover for the claims going out. You need to move to more balanced underwriting. “You need to put that in the context of two things. The first is that the clubs are mutuals. We are a non-profit making organization so we’re not looking to make a profit from our members. Over the long run you’re looking for a balanced equation which is different from the commercial market although we operate in a commercial environment. Providing insurance at cost is one of the greatest strengths of mutuality. The second is that most of the clubs are in either a strong or a very strong capital position.” Importance of China China’s travails during COVID affected the marine sector significantly. “In terms of Asia, the biggest pressure has been on China,” Mr. Cutler said. “The old analogy is that if America sneezes, the world catches a cold. But in terms of world trade now, China is absolutely dominant in the marine sector. It is either an importer of a massive amounts of material or it is an exporter of huge amounts of goods. The COVID restrictions clearly had an effect on some of this world trade.” Trade data emanating from China in mid-April indicate that total exports from the nation surged 14.8% in March on the back of the sale of electric vehicles and their components as well as trade with Russia. This was the first data to signify export expansion since September 2022. “China is coming out of COVID restrictions, having lifted those before Christmas, which has seen a significant change in terms of a very high level of trade going forward,” Mr. Cutler said. “Any time that China puts a fiscal stimulus package in place, that tends to be a good thing for the marine industry. Anything that promotes trade is a good thing.” A global business “The main driver of growth will be demand,” .Mr Cutler said. “If the world economy is growing, then ship owners and operators will respond to that. If the world economy isn’t growing for whatever reason, then the ship owners will have to respond in the opposite way.” “The main driver of growth will be demand,” .Mr. Cutler said. “If the world economy is growing, then ship owners and operators will respond to that. If the world economy isn’t growing for whatever reason, then the ship owners will have to respond in the opposite way.” He is equally realistic about the impediments holding back growth. “The restraints on world growth going forward will be a combination of macroeconomic factors,” Mr. Cutler said. “If you have inflation at rates that are beyond central banks’ appetites in the 2% to 3% range and, depending on where you are in the world, you’re running at 7% to 10% inflation - all of the central banks are looking for a balance to avoid recession. “The most obvious lever that’s being used is interest rates, which are high. That is designed to stop people spending money. They want to constrain consumption. They want to reduce inflation. They want businesses to contract and find efficiencies that will act as a handbrake on world trade. You can’t have world trade blossoming and seek to control inflation,” he said. Sustainability Report 2022 The marine industry is often placed at the centre of the ESG debate that is taking place around the world. From both a marine insurance point of view and also from a P&I club’s point of view, ESG considerations are often paramount. “There are a number of aspects to this,” Mr. Cutler said. “The first is in terms of individual club’s appetite for what you might call ESG-type investments. That’s for the individual clubs to take a view on but we do insure members who carry oil or coal or other items that are contrary to the direction of travel. “The reality is that until such time as we have alternative viable energy sources that meet the world’s needs, those are essential cargoes. You need to approach it from that angle. As an insurance company, to have an ESG investment policy that excludes these cargoes might conflict with you insuring them. If you’re not going to invest in them, that that might be a bit contradictory. However, that’s for individual clubs to take their own view on.” The International Group of P&I Clubs published its first sustainability report last year (Sustainability Report 2022) which said, “The marine industry’s move to meet ambitious targets concerning the reduction of greenhouse gas emissions from shipping is vital … This report explains how the group understands ESG in the context of its activities and where it contributes to a more sustainable shipping industry.” Mr. Cutler provides more context. “It’s not quite the same as a normal corporate sustainability report,” he said. “It very much approaches it from the point of view of what the group is and what we do. It’s looking at protecting the environment, responding to casualties, safety at sea, which includes seafarers and carriage of cargoes, all those things which fit into ESG. We have a part in the debate, but no one has all the answers so we very much focus on doing our things correctly as insurers,” he said.

We cordially invite you to the upcoming ASEAN Reinsurance Programme (ARP) - "Introduction to Reinsurance" via ZOOM conducted by the Malaysian Insurance Institute through the ASEAN Insurance Council (AIC). For more information, you may contact/email: Siti Malina Kaza at malina@mii.org.my

Since releasing our report “Insurance underwriting with nature: putting mangroves on the balance sheet”, we have been working with re/insurance companies in the Philippines to advance the pricing of nature-based coastal protection into their policies. Watch insights from our workshop with over 50 participants of the Philippine Insurance and Reinsurance Association (PIRA) to discuss our proposed solutions, which we are very pleased to see moving forward: 1. Companies integrating the value of mangroves into risk modelling and insurance underwriting. 2. A collaboration to develop a mangrove insurance product in the Philippines. 3. A common policy between local insurance and global reinsurers for how to recognize the value of nature in risk reduction. The session was a fantastic success and there were many takeaways, watch the video for a more detailed look. Thanks to Alejandro Litovsky of Earth Security, Erickson Balmes, Deputy Commissioner at the Philippine Insurance Commission Commission; Denden Tesoro, Head of Underwriting Division at Malayan Insurance Co., Inc.; Derick Narvacan, Country Head at Starr Insurance Companies Philippines; Allan Santos, CEO at Nat Re - National Reinsurance Corporation of the Philippines and Mitch Rellosa, Executive Director at PIRA Watch the video here.

Total premiums collected by microinsurance companies increased by 14% year on year to PHP11.53bn ($207.4m) in 2022, data from the Insurance Commission indicate. The premiums collected by mutual benefit associations (MBAs), and life and non-life microinsurance companies in 2022, as compared to 2021, are as follows: The number of lives covered by microinsurance stood at 57.75m in 2022, 7.64% higher than the 53.65m similarly-insured lives in 2021. The Insurance Commission attributed the increase in collected premiums and the number of insured lives to the increasing public awareness of the necessity of having affordable insurance products. The regulator actively promotes microinsurance among low-income earners, to help prepare them for risks such as deaths, injury, and damage to property or livelihood. Many Filipinos who buy micro-insurance are daily wage earners, such as drivers, ambulant vendors, and factory workers. Source: asiainsurancereview.com

and how to fix some of the underlying problems When the nation’s No. 1 and No. 4 property and casualty insurance companies – State Farm and Allstate – confirmed that they would stop issuing new home insurance policies in California, it may have been a shock but shouldn’t have been a surprise. It’s a trend Florida and other hurricane- and flood-prone states know well. Insurers have been retreating from high-risk, high-loss markets for years after catastrophic events. Hurricane Andrew’s unprecedented US$16 billion in insured losses across Florida in 1992 set off alarm bells. Multibillion-dollar disasters since then have left several insurers insolvent and pushed many others to reevaluate what they’re willing to insure. I co-direct the Center for Emergency Management and Homeland Security at Arizona State University, where I study disaster losses and manage the Spatial Hazard Events and Losses database (SHELDUS). As losses from natural hazards steadily increase, research shows it’s not a question of if insurance will become unavailable or unaffordable in high-risk areas – it’s a question of when. Reinsurers are worried Insurance is a vehicle to transfer risk. When an individual buys an insurance policy, that person pays to transfer the risk of expensive repairs to the insurer if the home is damaged by a covered event, like a fire or thunderstorm. Most policyholders don’t experience major disasters, so insurance companies make money. However, disasters are extremely costly when they do occur, so insurers also buy their own insurance, called reinsurance. Reinsurance costs have been rising fast in response to expensive disasters around the world in recent years. Reinsurers’ risk-adjusted property-catastrophe prices rose 33% on average at their June 1, 2023, renewal, after a 25% rise in 2022, according to reinsurance broker Howden Tiger’s analysis. If prices are too high and insurers can no longer transfer excessive risk to the reinsurance market, they are stuck “holding the risk” – meaning the cost of claims when disasters strike. A big enough disaster can put insurance companies out of business, or they can decide to leave the state, as seen in California, Louisiana and elsewhere. Responsible insurers are not in the business of gambling, so they do what State Farm and Allstate did: They reevaluate their portfolios – the various lines of insurance they offer, such as auto, life, property insurance and health insurance – and their prices. Insurance is a highly data-driven business and uses some of the most sophisticated climate and risk modeling in the world to forecast future risks, including the likelihood a property will be damaged by wildfire or other natural hazards. State Farm cited “catastrophe exposure” as a reason for ending new high-risk personal and commercial property and casualty policies in California. That refers to the likelihood that costly claims would exceed the risk State Farm was willing to accept. Why drop only California? So, why did State Farm and Allstate only stop new policies in California and not in other wildfire-prone states like Colorado or Arizona? The answer can only be speculative since State Farm or Allstate don’t publicly disclose their exposure. That’s calculated based on how many personal and commercial property and casualty policies the company holds in the state, particularly in the wildland-urban interface where fire risk is higher, and at what value. State Farm did cite California’s increasing wildfire risk and home construction prices, but there are other influences to consider. One is state insurance regulations that can limit premium increases, prohibit policy cancellations and require certain levels of coverage. Insurer Chubb’s chief executive mentioned restrictions that left it unable to charge “an adequate price for the risk” as part of the reason for its 2022 decision to not renew policies for expensive homes in high-risk areas of California. California also has a unique “efficient proximate cause” rule that forces property insurers to also cover post-fire flooding, such as mudslides. Rainy winters like 2023’s often trigger destructive mudslides in wildfire burn areas. What happens now? When insurers pull out of a community, residents and companies without access to property and casualty insurance are left holding their own risk – and paying the price if a disaster strikes. From a societal and political perspective, that’s a problem. Residents and businesses without insurance tend to recover more slowly. Uninsured residents often depend on donations, loans or federal individual assistance. The latter, however, is only available for catastrophic disasters and covers only immediate needs. To fill the gap and provide access to insurance, states including California, Florida, Louisiana and Texas have created either private or public insurance options of last resort with generally very pricey premiums. Residents covered by these options transfer their risk to the state, such as in Louisiana and Florida – meaning state taxpayers, who fund the state insurance programs, hold the risk directly or indirectly. In California, the privately insured FAIR Plan, in existence since 1968, wrote close to 270,000 policies in 2021, nearly double the number in 2018. Similarly, anyone purchasing flood insurance through the National Flood Insurance Program since 1968 is transferring their risk to federal taxpayers. The NFIP currently insures almost $1.3 trillion in value across 5 million policies. Politicians are not catastrophe risk experts, though, and do not make decisions based on data alone. In the short term, I expect that insurance pools, as well as federal- and state-run insurers of last resort, will add more policies, and that state legislators will incentivize the return of insurers. But while the political willingness to support such a trend exists, the financial resources do not. The National Flood Insurance Program has plenty of lessons to teach about the challenges of balancing exposure and keeping premiums affordable: It is more than $20 billion in debt. Texas has resorted to charging insurers operating in the state to help cover its program’s costs. Fixing insurance starts with the property itself Despite the risk of properties becoming uninsurable, communities today continue to permit development in floodplains, along coastlines and in the wildfire-prone wildland urban interface. Inadequate building codes allow developers to build homes that cannot withstand severe weather. These practices have placed millions of residents and the things they value in harm’s way. As climate change continues to dial up the frequency and severity of natural hazards, there are some steps states and communities can take involving property to lower the risk: Make smarter land use choices and limit development in high-risk areas to avoid placing people and the things they value in harm’s way. Adopt more stringent building codes and safety standards at state and community levels. Price risk into home sales, either through an insurance contingency that allows the buyer to withdraw when they cannot secure insurance or lower assessed property values for real estate in high-risk areas, which can dissuade builders and buyers. Require comprehensive disclosures of all present and future risks along with historic claims associated with a property to educate potential buyers. Make risk information accessible and understandable. My research shows that most people have a hard time fully grasping how likely they are to be affected by a catastrophic event. They need better tools that communicate the information in a way that resonates with them. Help residents in high-risk areas relocate through buyouts and managed retreat that returns the land to nature or public uses such as parks. Source: preventionweb.net

The speed and scale of biodiversity loss and ecosystem degradation is the highest in history. Biodiversity loss is the fourth most severe global risk over the next ten years. Join S&P Global in our 'Beyond ESG' series as we discuss the rising urgency of measuring nature-related risks & dependencies across assets, companies, supply chains, and investment portfolios. Join us for specialist perspectives on: Quantifying companies’ impacts and dependencies on nature Informing nature positive decisions Getting ready for TNFD S&P Global's 'Beyond ESG' webinar series focuses on providing corporates and investors with the tools and insights they need when building and refining their ESG playbooks. Featuring interviews and discussions with experts, decision-makers, and visionaries in the ESG community, these webinars will go beyond ratings and scores to help see the possibilities in building a sustainable future while meeting the expectations of an evolving market. Register below to join the discussion or receive the on-demand replay.

PIRA Executive Director Michael Rellosa was invited as a guest speaker to the 30th Founding Anniversary of the Association of Insurance Claimsmen, Inc. to give updates on the Non-Life Insurance Industry.

A combination of factors impacting fire risk, ongoing and new threats posed by the ripple effects of the Ukraine conflict, decarbonization challenges, economic uncertainty, as well as the rising cost of marine claims, means the shipping sector still has plenty of obstacles to navigate over the next 12 months and beyond, according to insurer Allianz Global Corporate & Specialty SE's (AGCS) "Safety & Shipping Review 2023". "Shipping losses have sunk to the lowest number we have seen in the 12-year history of our annual study reflecting the positive impact safety programmes, trainings, changes in ship design and regulation have had over time," said Captain Rahul Khanna, global head of Marine Risk Consulting at AGCS. Every year, AGCS analyses reported shipping losses and casualties (incidents) involving ships over 100 gross tons. During 2022, 38 total losses of vessels were reported globally, compared with 59 a year earlier. This represents a 65% decline in annual losses over 10 years (109 in 2013). Thirty years ago, the global fleet was losing 200+ vessels a year. "While these results are gratifying, several clouds appear on the horizon. More than a year after Russia's invasion of Ukraine, the growth of the shadow oil tanker fleet is the latest consequence to challenge shipowners, their crew and insurers. "Fire safety and the problem of mis-declaration of hazardous cargo must be fixed if the industry is to benefit from the efficiency of ever-larger vessels. Inflation is pushing up the cost of hull, machinery and cargo claims." Meanwhile, although the industry's decarbonization efforts are progressing, this remains by far the sector's biggest challenge. Economic pressures could put vital investments in companies' strategies, as well as in other safety initiatives, in jeopardy." Factors impacting the cost of claims Increased commodity prices, higher labor costs and supply chain disruption have had a significant impact on marine insurance claims, in particular hull and machinery. "The price of steel, a key cost driver in hull claims, increased sharply post-pandemic, as did spare parts. A typical propeller or machinery claim now costs around two times more than pre-pandemic," explained Régis Broudin, global head of Marine Claims at AGCS. "Shortages and delays in obtaining replacement parts have also led to longer stays in repair yards while labor shortages have also increased costs. This comes on top of the increased expense of dealing with large vessels, which face higher costs for repairs, salvage, and towing." The post-pandemic boom in container shipping has also impacted. Cargo values have risen with the increase in the price of goods and raw materials. Hotspots According to the report, there have been more than 800 total losses over the past decade (807). The South China, Indochina, Indonesia, and the Philippines maritime region is the global loss hotspot, both over the past year and decade (204 total losses). It accounted for one-in-five losses in 2022 (10) driven by factors including high levels of trade, congested ports, older fleets and extreme weather. The Arabian Gulf, British Isles and West Mediterranean waters were the second top loss locations (3). Around a quarter of vessels lost in 2022 were cargo (10). Foundered (sunk/submerged) was the main cause of total loss across all vessel types (20), accounting for over 50%. Fire/explosion ranked as the second top cause of loss (8). Vessel collision third (4). Source: asiainsurancereview.com

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