How do insurers promote sustainability?
Pardon the Interruption
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Re/insurers undoubtedly agree that as risk experts, they are positioned to promote sustainability and tackle some of the world’s environmental, social and governance issues.
Many do so by joining the UN-convened Net-Zero Insurance Alliance and Net-Zero Asset Owners Alliance.
Last month, the NZIA launched its first target setting protocol, which will enable members to set science-based, intermediate targets for underwriting portfolios in line with a net-zero transition pathway consistent with a maximum temperature rise of 1.5°C above pre-industrial levels by 2100. NZIA members are required to set and disclose their initial targets by 31 July.
While this is good news that firms have a framework to assess the impact of re/insurance activities on climate change, how do insurers set their sustainability strategies in the first place? What challenges do they face? In addition, how do insurers deal with those who hesitate to make the world a better place?
At a panel discussion during a conference organised by Fitch Ratings yesterday, three insurance sustainability chiefs talked about how they set their sustainability strategies and what challenges they face along the way.
Involve everyone in the process
Rebekah Clement, sustainability director at Lloyd’s of London, said given it operates in several territories, the corporation needs to think of all its constituents and bring all its members on the journey.
She added: “Take into consideration how mature each one of those firms is and how they're looking at ESG. Is it a board level strategy or priority? And do they have the capabilities in place to support to implement an ESG strategy? Of course it's a mixed bag. We’ve made it very clear in terms of what we were going to expect in the market over time.”
Clement said last year Lloyd’s asked each managing agent to submit their ESG strategy for the first time.
“Of course, you can imagine it was a mix and we will be coming back to the marketplace with our feedback comment in the first quarter of this year.”
Rachel Delhaise, head of sustainability at specialty re/insurer Convex, stressed the importance of engaging with employees through education.
For example, Convex has sponsored open-source environmental research programmes with a view to improving understanding of the impacts of global warming on the Arctic and increasing sea temperature on the world’s coral reefs.
“Through that we can help educate ourselves and get employees engaged in that.”
Make sure insurers understand their role
Olivia Brindle, head of sustainability at Fidelis, said she often met peers who underestimate the impact of insurers on sustainability.
“I've met people on a daily basis talking about ‘it's not our role to make the world a better place’ or ‘what impact can we possibly have? We are just insurers’.”
She highlighted the need to ensure insurers could facilitate the process.
“We have a huge role because we are essentially providing capital in a slightly different way to asset owners and finance providers. Without insurance, certain activities are impossible. Certain sectors would not exist without insurance. How we provide that is analogous to what banks do with financing.”
Be prepared to walk away
Brindle noted it is easier to promote sustainability through insurers’ investments and operations but underwriting is the most difficult area to drive change.
“There are no two ways about it, particularly on the non-life side. We as an industry insure things which are problematic, such as the oil and gas industry.”
She said last year Fidelis defined its ESG underwriting guidelines. This involved the company asking questions such as: “What are the issues that you care about as a company and how do we work those into our guidelines? What are the red flags? Also, what are some of the things that we're not prepared to cover?”
Brindle said if a risk involves energy or other ESG issues, the company would decide whether the company should accept the risk, request further information before a decision is made or reject the business.
“There have to be situations where we as underwriters are prepared to walk away.”
Accept data will not be perfect but start from somewhere
One main challenge for firms’ ESG reporting is the lack of good quality of data but Brindle urged peers to “start from somewhere” even though data is not perfect.
“What we hear from a lot of our peers… They think the data is not perfect. It holds them back from starting with something. As an industry we need to accept the starting point is not perfect.”
She acknowledged the target-setting protocol from the NZIA is “far from perfect” but urged firms to “make small steps over time”.
Consider new opportunities
Many insurers are in talks with governments and humanitarian organisations about closing the protection gap. One way of doing so is providing parametric insurance, which offers pre-specified payouts based on a trigger event.
Delhaise supported this approach because re/insurers are “always chasing off the same business” and believed that parametric could increase insurance penetration in some markets.
For Brindle, some opportunities “are easier to pursue than others”. For instance, she said renewable energy “is very established.”
Therefore, she encouraged insurers to consider supporting emerging technologies such as hydrogen or carbon capture. They are more challenging due to lack of history of understanding the risk, but she said the industry needs to be “a bit bold” instead of insuring, for instance, a windfarm simply because the risk is easier to understand.
What else can insurers do to make the world a better place?
