UK pension schemes should pay attention to reinsurers’ ESG policies

Reinsurers are in the process of establishing environmental, social and governance (ESG) policies, but they have yet to achieve the highest standards. With more UK defined benefit (DB) pension schemes annuitising liabilities, reinsurer ESG policies are becoming more important. Pension schemes should use their power to encourage insurers to extend their ESG policies to their reinsurance partners.

Within the UK pension market, ESG concerns are primarily viewed through the lens of asset management. For those pressing ahead to physically settle their liabilities through annuities, insurer ESG policies also matter. But reinsurers are important too, because the longevity risk for many bulk annuities is passed through insurers to reinsurers.

Some of the largest UK DB schemes have also set up longevity swaps with reinsurers to mitigate the risk of people living longer. When we consider that asset owners have a material role in making the world a better place, reinsurers themselves are also asset owners.

So, we conducted a full ESG survey of 12 reinsurers over 2023. The results varied.

Reinsurers are continuing to develop ESG policies

Since our last reinsurer survey in 2022, many reinsurers are

• Improving the access and availability of ESG data for investment analysis (including securing third-party data where required)
• Developing and integrating internal ESG policies

As a result, we up rated these reinsurers for demonstrating improved ESG integration and more detailed ESG policies. However, some reinsurers have remained static when compared to 2022.

We also saw improvements from 2022 in the incorporation of ESG concerns into the investment process. Many reinsurers reported that they are working toward net-zero targets — both in their own businesses and in their investment portfolios, too.

The graph below shows where reinsurers report that ESG information is included in various parts of the investment process.

 
Most reinsurers confirmed that they maintain a specific or firm-level statement addressing modern slavery. Also, 70% confirmed that they maintain a publicly available statement concerning their approach to human rights.

How reinsurers are rated

From a total score of 12, no reinsurer has yet scored full marks. Among the reinsurers with high marks:

• Two reinsurers scored 10 or 11
• Three reinsurers scored nine

A third of reinsurers scored six or less. So, how do reinsurers improve?

How do reinsurers stop losing marks?

We down rated some reinsurers because they didn't provide detailed responses. In some cases, some reinsurers have reduced ESG disclosures since 2022. Overall, lower-rated reinsurers struggle with a lack of collaborative engagement with societal, country or industry groups such as Climate Action 100+, the Net Zero Asset Owner Alliance and The Investor Alliance for Human Rights.

Important for holistic analysis

In conclusion, we suspect that societal and governmental pressures are less prominent in some of the jurisdictions where reinsurers base their main operations. However, given the role of reinsurers through the course of an insurance transaction, pension schemes that consider ESG holistically will want to understand the ESG policies of relevant reinsurers.

Schemes have the greatest influence on the market when selecting an insurer. They can put this to good use by pushing insurers to also in turn, influence their reinsurance partners to apply higher ESG standards.