Integrating environmental, social and governance factors into insurance is no longer a choice but the only option available for an industry that has a fundamental role to play in the sustainability agenda, says Singapore College of Insurance’s Ms Karine Kam.
Through the risks they underwrite, insurers have the ability to escalate environmental risk to corporate decision makers and promote risk-mitigation measures to steer clients onto a more sustainable path. Such an outcome would naturally also have a positive impact on the (re)insurance industry, which is all too familiar with the impact of climate change through the increased frequency and severity of natural catastrophe events.
And as an industry that manages risk, promoting the adoption of environmental, social and governance (ESG) principles both within and outside of the insurance industry should help with future loss mitigation – be it through arresting rising sea levels or a reduction in the number typhoons impacting a region.
Sustainability framework for insurers
In 2012 the United Nations Principles for Sustainable Insurance (UN PSI) set the ball rolling when a landmark framework was realised with principles that integrated ESG criteria into insurance business. Eight years on, the number of signatories to the UN PSI has risen from 27 to 90, including many of the world’s leading (re)insurers.
To recap, the framework outlines four principles for sustainable insurance:
- Embed ESG issues relevant to insurance business in decision making
- Work together with clients and business partners to raise awareness of ESG issues, manage risk and develop solutions
- Work together with governments, regulators and other stakeholders to promote widespread action across society on ESG issues
- Demonstrate accountability and transparency by regularly disclosing progress in implementing the UN PSI
But while the commitment to integrate ESG principles into insurance is voluntary, insurers are increasingly obliged to pay close attention given the direct impact that sustainability has on an insurance company’s balance sheet – including from regulatory, investment and underwriting perspectives.
Of late, regulation is acting as a strong push factor for insurance companies to start looking much more closely at the sustainability agenda.
Last December, for example, the Monetary Authority of Singapore (MAS) published a framework titled ‘Guidelines on Environmental Risk Management for Insurers’, which sets out the regulator’s expectations of environmental risk management for all insurers. The guidelines cover governance and strategy, risk management, underwriting, investment and disclosure of environmental risk information.
In publishing its guidelines, MAS said that environmental risk has potential financial and reputational implications for insurers. Hence, the regulator deems it crucial for insurers to build resilience against the impact of environmental risk as part of their business and risk management strategies.
Meanwhile, the EU regulation on sustainability-related disclosures in the financial services sector (SFDR) is set to come into force on 10 March 2021. The SFDR provides a set of
ESG disclosure standards for financial market participants, with the aim of providing investors with accurate and clear product-specific ESG information across a broad range of providers, including insurers selling insurance-based investment products. This is important as the increasing popularity of ESG funds may influence the types of unit-linked products offered by insurers.
Integrating ESG considerations into the investment strategies of insurers has become mainstream and the COVID-19 crisis has accelerated insurers’ focus in this area. ESG investing has been shown to deliver better risk-adjusted returns in the longer term, but also provide downside protection during periods of high volatility as was the case in the first half of 2020 amid the COVID-19 storm.
Insurance companies are also increasingly exploring how best to align with the Paris Agreement objectives of containing global warming to under two degrees Celsius. This could be in the form of reducing carbon intensity of existing investment portfolios or undertaking thematic and impact investing.
A global survey of insurers by BlackRock done in June-July 2020, revealed that 54% of respondents had invested in specific ESG strategies in the last 12 months. Conversely, 32% said they turned down an investment opportunity in the last 12 months over ESG concerns.
Underwriting for impact
While ESG considerations feature prominently on the asset side of the balance sheet, they seem to factor less in underwriting deliberations.
A handful of insurers are known to undertake ‘ESG screening’ when identifying new risk or renewing an existing risk. Such screening helps insurers not only manage their financial risk exposure but also their reputational risk exposure.
ESG indicators are instructive in assessing if a company has a higher probability of experiencing incidents such as workforce-related accidents, being involved in reputation-damaging controversies, or being fined by regulators or government agencies, according to a research by Allianz.
‘Impact investing’ should go hand in hand with ‘impact underwriting’ in order to shift behaviour holistically in a more sustainable direction. Such a move could potentially enable companies that score highly in ESG assessments to use it to their advantage with regards to their risk-transfer arrangements.
There is increasing evidence of a correlation between a company’s ESG policy and employee sentiment, with recent research by Marsh showing that ESG performance can help companies improve employee satisfaction and attract prospective employees.
By 2029, millennials and Gen Z will make up over 70% of global workforce compared to 52% in 2019. These groups generally place greater importance on sustainability issues than previous generations and may expect their employers to be in sync on such values. Thus, how an organisation performs on the ESG front may have a significant bearing on whether they can attract younger talent into their fold.
Insurers may find themselves involved in the war for ESG leadership talent – individuals who are aligned both philosophically and commercially with the concept of sustainability.
Together we can shape a more sustainable future
The challenge for training institutions like the Singapore College of Insurance is to help produce and nurture talent for the insurance industry as it prepares itself for the green economy.
In the coming months, SCI will be launching an International Research Hackathon on Green Insurance and Sustainable Risk Management, the first of its kind to raise greater awareness, create opportunities for innovative solutions and to pool the synergistic efforts of all stakeholders in the sustainability value chain.
As a member of the ASEAN Insurance Education Committee, SCI will be producing the curriculum for ‘Sustainable Insurance, Risks and Climate Risk Management in ASEAN Insurance Markets’, one of the core subjects within the ASEAN General Insurance Diploma that will be launched at the 4th ASEAN Insurance Summit. SCI will also be launching a certificate course on ‘Green Insurance and Sustainable Risk Management’.
And to keep the issue of sustainability in insurance at the top of the minds of industry leaders, we will, in collaboration with Asia Insurance Review, be running a series of commentaries and interviews in the coming months with thought leaders to stimulate further discussion on this important topic. A
Ms Karine Kam is CEO of Singapore College of Insurance.