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Four key ways that insurance companies could develop ESG strategies

Blog Feb 25, 2022

ESG strategies are certain to impact the insurance industry in the coming years in several critical ways.

In the wake of a global pandemic, with the crippling effects of climate change becoming ever more apparent every year, ESG principles have rapidly moved to the top of insurers’ strategic agendas. According to UK environmental non-profit CDP, climate change alone could potentially generate $1 trillion dollars worth of financial risks.

Situations such as the above can result in wider effects than higher operating costs for insurance companies or customers becoming impossible to insure. Without clear and transparent environmental governance, insurers may begin to lose the business of major customers. Coupled with evolving mindsets around topics such as gender, race, and sexuality, ESG is certain to impact insurers’ strategies in the coming years in several critical ways.

Insurers will need to appoint and empower CSOs to lead ESG strategy

One of the clearest signs is the growing number of insurance companies appointing chief sustainability officers (CSOs) or their equivalent to help form and lead those firms’ ESG strategy. Those CSOs face a wide number of challenges. These include insufficient resources, an uncertain governance structure, and most previous ESG efforts occurring in siloes.

Insurers need to equip CSOs to face these challenges to avoid closer regulatory scrutiny and lose the support of stakeholders with an investment in ESG issues.

What’s more, the onus will be on insurers to ensure that they are involved in their customer’s own ESG transitions from an early stage.

Katie Lennon, Head of ESG, UK & Lloyd’s Market AXA XLAs, notes how her company is working to make sure that clients understand how they change their risk profile as they transition their business focuses. For example, adapting to events such as COVID-19, climate change, or human rights issues could include the incorporation of new technologies or collaboration with insurtechs to produce new insurance products or services, technologies which may carry new liabilities.

Enhanced reporting and metrics become essential to ensure ESG goals are met

Risks associated with ESG include aspects such as climate, transitional, and social risk are very difficult to evaluate due to inaccurate – or in many cases, non-existent – data.

Meredith Jones, head of Aon’s environmental and social corporate consulting practice, notes how most insurance companies know that they need to address ESG, but that “…a fragmented data landscape coupled with evolving modeling capabilities means it can be difficult to develop, execute, and disclose an ESG strategy.”

In order to truly move from a model of good corporate citizenship to genuine ESG implementation, insurer CSOs will need metrics that can express the ROI in more vivid terms to gain the support of stakeholders.  

The power of such analytics will become manifest in how they help insurers to gain a stronger grasp of issues such as global warming and then apply that understanding to making more informed judgements.

Transparent communication of ESG purpose to all stakeholders is critical

Besides establishing firm and integrated internal governance and measurement policies with regard to ESG, insurance companies need to maintain transparent communication with all relevant stakeholders on those policies. What’s more, those firms will need to display an understanding of which ESG element speaks most directly to those different stakeholders, rather than send a broad message.

As Rob Anarfi, Chief Risk Officer at Beazley notes, insurers making bold statements about what they will or will not cover run the risk of doing a disservice to a particular customer group.  

For example, Dr Ruth Middleton, Chief Risk Officer, AIG Life UK & EMEA Life & Retirement AIG, emphasizes how insurers can publish more about topics such as gender and diversity and be more transparent on these elements.

These kinds of activities can help insurance companies to send more nuanced messages to stakeholders who might be more concerned about insurer standpoints on one particular aspect of ESG. 

ESG and digital transformation must go hand in hand

If there is a strongest motivator for an insurer to initiate a digital transformation, it is ESG. And without the digital tools necessary to collect data and establish processes around ESG governance, most efforts are likely to fail.

The most common challenge insurers face with regard to digital transformation is dealing with legacy systems.

According to outgoing chief operating officer at Allianz, Stephanie Smith, digital transformation is not just an element of ESG, but the key enabler to its adoption and implementation.

“The most obvious benefit is the removal of paper-based communication, but there’s also the old adage that ‘what gets measured gets done’,” she says. “This means setting bold targets, measuring the difference being made. This will include an insistence on customers adopting digital channels to enable the recording and tracking of data at a basic level.”

Additionally, digital transformation will also be critical to the management and the application of the data collected from customers.

As Ian Jacob, chief risk officer at Aston Lark observes, “As an industry, we’re hungry for data scientists now…Trying to achieve this manually is very expensive, so digital transformation becomes a necessity.”

However, one of the main reasons digital transformation fails is not technological, but cultural. People are generally resistant to change, so it falls on the insurer’s leadership to not only make sure the change is fully resourced, but to own the change themselves.

The digital transformation journey might feel painful for insurers still relying on legacy systems. However, the tools are available to assist if both leadership and staff buy in. Otherwise, ESG strategies are sure to crumble beneath the weight of unmanaged data, inefficient systems, and employee resistance to change.

Actions Needed by InsurersSummary
Empower CSOs to lead ESG strategy Insurers must empower CSOs to face challenges like insufficient resources, uncertain governance, and siloed ESG efforts. Insurers should be involved in their customer’s own ESG transitions from the early stage to prevent coverage gaps.
Enhanced reporting to ensure ESG goals are met  Insurance companies will need more tangible metrics to gain the support of business line and functional leaders. These analytics will help them better grasp trends and make informed underwriting decisions.
Transparent communication of ESG goals to all stakeholders  Insurers must show an understanding of which ESG element speaks to which stakeholders, not send a broad message. Insurers can publish on and be more transparent about ESG topics such as gender and diversity.
ESG and digital transformation go hand in handKey challenges to digital transformation include legacy systems as well as staff resistance to change. Insurance companies should insist customers adopt digital channels to record and track data.