ABSTRACT
This chapter examines ESG risk management in the insurance sector, focusing on regulatory, solvency, and market-driven influences on investment portfolios and insurance risk exposure. It reviews ESG-related regulations and initiatives, particularly those addressing climate-related physical and transition risks, and evaluates their implications for capital adequacy and risk management. Using LSEG Workspace (2020–2025), the analysis explores risk mitigation strategies through financial instruments and their impact on insurers’ balance sheets. Under Solvency II, the Solvency Capital Requirement and own-funds structure are essential for absorbing ESG-related losses, while ORSA projections must integrate climate risks for long-term resilience. Empirical evidence indicates that higher ESG scores are associated with more conservative investment profiles, lower volatility, and greater reliance on underwriting income. European insurers exhibit stronger environmental performance and more positive asset allocation responses than US firms. This chapter also assesses catastrophe risk and catastrophe bonds, highlighting both their risk-transfer benefits and associated model, liquidity, and climate uncertainty risks. Despite data and disclosure challenges, ESG integration enhances financial resilience and supports sustainable value creation.
