Does ESG Performance Reduce Default Risk in Insurance Firms? Evidence From Life and Non-Life Sectors

This study examines whether environmental, social, and governance performance is associated with lower default risk in European insurance firms, and whether the strength of this association differs between life and non-life business models. Default risk is measured through Bloomberg market implied probabilities of default derived from structural credit risk models at 1 year and five-year horizons. ESG performance is proxied by the composite ESG score provided by LSEG. Using an unbalanced panel of 152 insurers from 22 European countries over 2014 to 2023, we estimate panel quantile regressions to allow the ESG default risk relationship to vary across the conditional distribution of default risk. Across the full sample, higher ESG performance is associated with lower short term and long-term default probabilities, with economically larger and more robust effects among non-life insurers and among firms in the upper quantiles of default risk. For life insurers, the estimated association is weaker and less consistently significant across quantiles, suggesting that capital strength and asset liability management remain the primary drivers of market implied solvency over longer horizons, while ESG performance operates as a complementary factor rather than a dominant determinant. A set of robustness exercises based on alternative functional forms, lagged ESG measures, an accounting-based stability proxy, and endogeneity-oriented specifications support the main pattern of results. The findings have practical implications for integrating sustainability variables into solvency relevant risk governance. In non-life, governance quality, transparency, and operational risk controls appear most closely linked to lower default risk. In life, ESG policies are best interpreted as part of long horizon risk management and investment discipline, and not as a substitute for core capital and asset liability management.