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Selling Practices & Product Labeling

Transparent Information & Fair Advice for Customers

Insurance products play an important societal role in alleviating the impact of unexpected economic shocks, allowing policyholders to minimize the financial impact of events such as illnesses, accidents, and deaths. However, the risks of unclear insurance policies, ambiguous product terms, and potentially misleading sales tactics can erode brand reputation, lead to legal disputes, and reduce the number of services and products offered. This may be especially true if regulators deem certain policies overly complex and unsuitable for customers. Moreover, insurance companies compete on the basis of financial strength, price, brand reputation, services offered, and customer relationships. Customer dissatisfaction may reduce insurance usage, potentially leading to extremely negative financial outcomes for individuals and families, such as personal bankruptcies. As financial regulators continue to emphasize consumer protection and accountability, companies that maintain transparent policy terms and direct customers toward the products best suited to them will be better positioned to maintain their brand reputation, avoid regulatory scrutiny, and protect shareholder value. Failure to inform customers about products in a clear and transparent manner may result in higher number of complaints filed against companies, customer churn, and in some instances, regulatory fines and settlements.

Product Design & Lifecycle Management

Incorporation of Environmental, Social, and Governance Factors in Investment Management

Insurance companies are responsible for investing capital to ensure the preservation of premium revenues equivalent to expected policy claim payouts and must be able to maintain this asset-liability parity over the long term. As environmental, social, and governance (ESG) factors have increasingly been shown to have a material impact on the performance of corporations and other assets, there is an increasing need for insurance companies to incorporate these factors into the management of their investments. Failure to address these issues could lead to diminished risk-adjusted returns of their portfolios and limit a company‘s ability to issue claim payments. Companies should therefore enhance disclosure on how ESG factors, including climate change and natural resource constraints, are incorporated into the investment of policy premiums and affect the portfolio risk.

Policies Designed to Incentivize Responsible Behavior

Advances in technology and the development of new policy products have allowed insurance companies to limit claim payments while encouraging responsible behavior. The industry is subsequently in a unique position to generate positive social and environmental externalities. Insurance companies have the ability to incentivize healthy lifestyles and safe behavior as well as the development of sustainability-related projects and technologies such as those focused on renewable energy, energy efficiency, and carbon capture. As the renewable energy industry continues to grow, insurance companies may seek related growth opportunities by underwriting insurance in this area. Additionally, such policy clauses that provide incentives through incorporation of environmental, social, and governance (ESG) factors can be used as tools to mitigate risk in the overall underwriting portfolio, which can reduce insurance payouts over the long term. Therefore, disclosure on premiums written related to energy efficiency and low carbon technology as well as discussion of how companies incentivize health, safety, and/or environmentally responsible actions or behaviors would allow investors to assess how insurance companies manage their performance on this topic.

Physical Impacts of Climate Change

Environmental Risk Exposure

Catastrophe losses associated with extreme weather events will continue to have a material, adverse impact on the Insurance industry. The extent of this impact is likely to evolve as climate change increases the frequency and severity of both modeled and non-modeled natural catastrophes, including hurricanes, floods, and droughts. Failure to appropriately understand environmental risks and price them into the underwritten insurance products may result in higher than expected claims on policies. Subsequently, insurance companies that incorporate climate change considerations into their underwriting process for individual contracts as well as the management of firm-level risks and capital adequacy will be better positioned to protect shareholder value. Enhanced disclosure of a company’s approach to incorporating these factors, in addition to quantitative data such as the probable maximum loss and total losses attributable to insurance payouts, will provide investors with the information necessary to assess current and future performance on this issue.

Systemic Risk Management

Systemic Risk Management

Insurance companies have the potential to pose, amplify, or transmit a threat to the financial system. The size, interconnectedness, and complexity of insurance companies are factors that highlight exposure to systemic risk for companies in the industry. Insurance companies that engage in non-traditional or non-insurance activities have been identified by regulators as being more vulnerable to financial market developments and subsequently more likely to amplify or contribute to systemic risk. As a result, insurance companies face the potential of being designated as Systemically Important Financial Institutions. Such firms are subject to stricter prudential regulatory standards and oversight by the central banking systems in various jurisdictions. Specifically, these insurance companies will likely face limitations relating to risk-based capital, leverage, liquidity, and credit exposure. In addition, insurance companies will be required to maintain a plan for rapid and orderly dissolution in the event of financial distress. Regulatory compliance can be very costly, while the failure to meet qualitative and quantitative regulatory performance thresholds could lead to substantial penalties. To demonstrate how these risks are being managed, insurance companies should enhance their disclosures of key aspects of systemic risk management and their ability to meet stricter regulatory requirements.

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