A Quantitative Framework for Incorporating ESG Factors in Insurance
Ashwani Roy, Dr Rui Qin, Dr Yingjie Wang · 2025-09-16
ESG has moved from reputation management into the centre of actuarial and financial modelling. For insurers it affects both sides of the balance sheet: assets, through stranded exposures, green bonds and credit risk adjustments, and liabilities, through climate-driven catastrophes, morbidity and litigation. Solvency II, IAIS climate supervision and TCFD all require ESG to be addressed, yet most implementations remain qualitative or scenario-based. This paper builds the mathematics to embed ESG directly into the models insurers already run.
Main contributions
- ESG-adjusted hazard rates extending the intensity framework that underpins both credit default and actuarial mortality, with environmental, social and governance drivers entering as stochastic processes alongside the baseline hazard.
- Valuation on both sides of the balance sheet, covering default probabilities and risk premia on assets, and mortality, catastrophe frequency and ESG-sensitive discounting on liabilities.
- Pricing principles extended to carry ESG loadings, with hazard-based and machine learning approaches set against each other on tractability and interpretability.
- Stress testing and solvency capital formulated with ESG shocks embedded in the stochastic model rather than applied as a scenario overlay, aligned to NGFS and supervisory scenario design.
- A worked case study contrasting orderly and disorderly transition pathways, with the calibration and data limitations stated rather than assumed away.
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