ESG and insurance underwriting: everything still needs to be done

How are Insurance companies integrating ESG in their core business? To start with, let’s have a look at the most impacting domains. Obsiously, two activities are mostly concerned with ESG aspects, and Climate Change issues. On the first hand, we find the Investments activities, since the insurance business is an investment-intensive activity, and any insurer thus invests the money of its customers. On the second hand, one of the mostly concerned activity is the underwriting—which concerns all things related to the insurance contracts and policies, both for the individual, or for the corporate customer.

The insurers—or, at the very least, the biggest of them—have been integrating, for years now, the ESG criteria into their investments… in a more or less serious way. But the real core of the insurance business is not the investement per se, and the asset management activity is indeed usually operated within a separate branch. Their existing approaches are unfortunately generaly very far from providing real anwsers, to real-world problems.

For whom the bell tolls

Climate Change, for instance, is not only a real-world stake, and insurers are not only one of its main actors, but, more problematically for them, one of its most (indirectly) concerned “victims”: the consequences of Climate Change have indeed a strong impact on the frequency and intensity of extreme weather events (sea level rise, flood, storms, etc.), with an increasing financial impact on the insurers finance, and their reinsurers: Year after year, the situation greatly exceed all the forecasts, both in term of weather or budget…

With the expected aggravation and unpredicatability of these natural disasters, in a maybe not-so-distant tomorrow, could hence insurers be put on default ? The modern role of an insurer should indeed not only to pay—when it’s too late (i.e. after the occurence of a risk)—but, more important, its role should be to prevent, or reduce, as much as it is possible, the occurence of the risks… a principle which is maybe currently too much out of sight within the insurance business—when it comes to the ESG stakes.

When I’m speaking of more or less serious approach to the integration of ESG topics in the insurance business, I’m particularly questionning the idea of, e.g., integrating ESG criteria, whereas at the same time continuing to invest in enviromentally or socially detrimental activities, such as fossils fuels, dangerous pesticides, etc.

This way to conduct an insurance business is surely a short-sighted one… and one for which insurers, their shareolders, and eventually, the insurees, will pay a high premium, in the long run… included also in term of reputation! And shareholders are, let’s say the word, accomplice of this situation—since researches have demonstrated that ~95% of the resolutions are positively voted during Annual General Meetings—despite the increasing concern of the whole society regarding the ESG stakes, and especially of the youngest generation.

Researches have demonstrated that ~95% of the resolutions are positively voted during Annual General Meetings—despite the increasing concern of the whole society regarding the ESG stakes.

As a modern investor, do I indeed really want my capital to be invested in activities currently compromissing the future of mankind, if not of the whole planet ? My own future, and the future of my children ?

—It tolls for thee

We are all in the same boat—a ship of fools… Thus, today, it must be first stated, to the insurers’ investment companies truly wanting to progress in the right direction, that exclusion policies are no longer enough—especially when the results are not publicly disclosed, and are thus, silently, regressing, instead of progressing. And, in 2050, it will be too late to take action, considering the current environmental impact of human activities, and the CO2 emissions released into the atmosphere.

No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.

— John Donne, Meditation XVII, Devotions upon Emergent Occasions, 1624 (translated from Early Modern English)

But where to start ? For instance, a Carbon Footprint of all investments instruments could be disclosed—to date, very few investors disclose such information—along with a true Energy Transition strategy. Here again, we could count the insurance companies on the fingers of one hand… Even worst, in the underwritting domain, everything still needs to be done, in order to integrate the ESG criteria into the insurance underwritting process.

The UNEP FI PSI initiative, Principles for Sustainable Insurance, is laudable, but so far it brings no, or little, solution on the table. It’s nevertheless a must-read, and inspiring source for the insurance top-management, and one which sets the moonshot for the whole industry.

Sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues. Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance, and contribute to environmental, social and economic sustainability.

The UNEP FI Principles for Sustainable Insurance

A maybe sharpest approach is the one proposed by the EU through its taxonomy for sustainable activities, published in June 2019. The document underlines the role of Insurance as a key sector in the economy transition and climate mitigation. It thus demand to the whole sector to assume its full responsibility in the integration of ESG criteria into its core business. The work produced by the EU is of a great quality, and rooted in strong convictions. Let’s hope it will help foster the transition toward a more sustainable world.

The “EU taxonomy for sustainable activities” underlines the role of Insurance as a key sector in the economy transition and climate mitigation.

But will these requests of the EU and UN be followed by concrete actions from the industry ? The answer lies in the hands of the insurance sector. The context is nevertheless clear enough—those who want to survive and still be there in 2050 need to take action. Now. But the insurers need to be commited to integrate ESG risks into insurance underwritting not only because their customers, or shareholders require it, but because their financial future—and our own future—depends on it. It’s a question of survival, which needs to be fully understood, and integrated on a daily basis, by the top management, and the whole management. Then things could be set, eventually, in movement, and positive impact delivered, possibly very quickly.

Integrating the ESG riks in the insurance underwritting is, indeed possible. It requires, mostly, a commitment to achieve this goal, and the right approach. That’s why, at Impactin, we have developped our own insurtech solution allowing to score the ESG risks of an insurance contract, to measure the ESG impact of a corporate insuree’s activity, and even to accompany the corporate insurance customer into its positive impact journey, and ecological transition—for the greater good.

Yes, all of this is possible, there are no excuses any longer in the Insurance sector—and our mission here is to help you achieve your own sustainable goals! Let’s get started.

References

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