Re/insurers in LatAm will increase their scrutiny and capabilities to evaluate climate change related risks

In the face of new ESG and climate change financial disclosure regulations, in 2022, Latin American companies without an adequate net-zero strategy will find it increasingly difficult to get the insurance cover they need.

Regulators throughout Latin America issued new ESG disclosure obligations in 2021. In Chile, listed companies are now required to report their environmental initiatives, investments and goals related to the consumption and production of polluting materials, energy and waste, the total percentage of non-renewable energy sources they use and the policies they have adopted to reduce greenhouse gas emissions.

Colombia recently issued its ‘Climate Action Law’, which seeks to provide the country with the tools to fulfil its Nationally Determined Contributions (NDCs) and reach net zero by 2050. It has announced further reductions in its NDCs – from 30% to 50% by 2030 – which will have an inevitable impact on the financial system. In addition, the regulator announced that as part of its risk-based supervision strategy it could start requesting financial institutions to disclose their climate impact but stopped short from imposing a mandatory requirement. Despite this, it is reported that 64% of financial institutions in the country have set out policies or strategies to incorporate climate risk analysis into their operations.

It is estimated that in the event of climate disasters only between 2% and 4% of total losses in Colombia will be insured. Increased availability of insurance will be essential in managing the impact of climate change in LatAm, since private risk transfer means that governments will end up paying less from already badly depleted public budgets. Insurance cover also helps to mitigate losses in the financial system in the event of a large-scale loss by preventing credit defaults.  

However, with standards rising and the increasing emphasis on corporate disclosures through TCFD and investor initiatives companies in LatAm, that are lagging behind in implementing a net zero strategy, will find it harder to hide from interested stakeholders. If climate risk is not being considered, it could potentially be more difficult to secure insurance cover on favourable terms or at all. Increasingly insurers will have regulatory obligations to evaluate their own climate risk exposure and will be requesting information regarding their clients’ consideration of such risks. This could well be a factor in coverage discussions. In terms of liability risks, boards that show indifference to the threats posed by climate change could face challenging discussions with their D&O insurers.

Businesses in sectors heavily exposed to climate events in the short term, such as shipping, agriculture and mining will have to show they are being proactive in mitigating risk. 

View all our Insurance 2022 Predictions here