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Oct 2019

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Principles of insurance - should they evolve and how?

Source: Asia Insurance Review | Oct 2019

The guiding force for insurance, and other businesses, should no longer solely be on maximising shareholder value – but in delivering a more sustainable future for the industry and the environment, says Ed Broking’s Marcus Taylor
 
 
Immediate shareholder value is no longer the sole driving factor. The adoption of ESG principles into a broader new set of insurance principles will help to deliver a more sustainable industry, with better underwriting results through loss mitigation and risk selection
 
Insurance is defined as the equitable transfer of risk of loss from one entity to another, in exchange for a premium. It has long operated on some fundamental principles governing action and conduct across the industry.
 
However, as the world becomes more complex and the world of business evolves to address the challenges associated with various economic, environmental, social and governance issues, should these fundamental principles of insurance also evolve? Should they adapt to more ethical trading and investment principles within our industry?
 
Corporates - both inside and outside the (re)insurance industry - have long run sustainability initiatives under the banner of corporate social responsibility (CSR) and many companies have CSR policies in place. However recently, the conversation has moved on somewhat to environmental, social and governance (ESG) issues.
 
Whilst ESG is intrinsically linked to CSR, there are differences. Many corporates refer to CSR at a day to day level for volunteering and philanthropic activities etc, while ESG is more intertwined at a macro level measuring the sustainability and ethical impact of investments in a company – the driving force behind new corporate and industry led principles.
 
Across the financial world, including (re)insurance, there has always been pressure of growth and driving shareholder returns. However, recent discussions at the Business Roundtable (an association of CEOs of America’s largest companies) have seen some move the discussion away from solely immediate shareholder value, to driving business purpose and principles as stakeholder value. 
 
The leading corporations that make up the Business Roundtable are now stating that customer value, investing in employees, fair and ethical supplier relationships, and care for the community and environment should now form the basis of the purpose and responsibility of a business; in addition to long-term shareholder value.
 
By its very nature the (re)insurance industry addresses some aspects of ESG, whether these are social or environmental impacts, but should we be doing more on issues such as climate change, which will require efforts from the entire industry working together? It is clear that there are many amazing initiatives already occurring, some industry-led, but more often than not led at a corporate entity level. Can we learn from the wider world of business to evolve? 
 
The Asia Pacific perspective
One of the most advanced and high-profile industry-led initiatives is through the United Nations Principles for Sustainable Insurance. It has published global guidance on the introduction of integrating ESG risks into insurance underwriting. Whilst the UN PSI are a wonderful example of the industry working together for the greater good, the picture is less positive in Asia. Upon closer inspection, only 3% of the signatories are from the developing Asian economies.
 
The listing of 67 signatories includes many of the world’s leading (re)insurance organisations, but the relative low numbers in developing Asia are of concern, especially given the impact that natural catastrophes can have in these territories.
 
It is not just the Asian (re)insurance industry where ESG hasn’t taken hold. This is a common theme across many industries in Asia – in a region which could and should be leading the way.
 
Japan is one of the nations taking the lead in Asia, with the government now offering incentives on trade insurance terms. Companies wanting to qualify for such incentives must first proactively offer information on their climate change countermeasures. This move is intended to support overseas sales of environmentally friendly electricity generation facilities and energy saving equipment, as well as investment in foreign companies involved in these areas. Qualifying services include solar and wind power, carbon capture and utilisation, hydrogen power and battery technology.
 
Climate change is undoubtedly going to have a significant impact across the Asia region. Despite this, recognition of such impacts and mitigation efforts appear slow – with some exceptions. In a recent National Day address the Singapore prime minister recognised the need to address climate change and combat rising sea levels – with 30% of Singapore’s land area being less than 5 metres above sea level the threat is very real here. It should be possible for the Singaporean and regional governments to work in collaboration with the insurance industry to help with loss mitigation efforts, disaster relief and risk transfer solutions. 
 
Issues such as climate change cannot be tackled in isolation or by individual group companies. Rather, to make any meaningful impact these topics should be met head-on by the entire industry in collaboration with industry bodies (eg UN PSI) and governments.
 
Further, in an industry so driven by financial soundness, all the major rating agencies have now recognised that companies are increasingly exposed to ESG risks, ultimately impacting their financial resources. Thus ESG evaluations are being carried out that could have an impact on future credit ratings.
 
Benefits and incentives
We are a risk management industry, but maybe instead of seeking short-term gains through market cycles, we should be taking a longer-term view - adapting our principles as per the US Business Roundtable and becoming more accountable for some of the world’s pressing issues.
 
With more investors factoring ESG criteria into their decisions, doing so becomes a win-win situation for the insurance industry – whether through receiving incentives for adoption of ESG or more access to capital through a broader and more conscientious investor base.
 
Aside from these high-level incentives and more conscientious investor base, there remain a number of other benefits to our industry for adopting ESG principles.
 
At the macro level, (re)insurance in Asia is seriously affected by climate change – with the ever-increasing frequency and severity of natural catastrophe events. Adoptions of ESG principles should help with future loss mitigation, whether through a stalling of rising seas levels or reduction in the number of typhoons impacting the region.
 
At the day-to-day level, over the next decade millennials will start to make up the bulk of the global workforce. These millennials are increasingly demanding to work for businesses with a purpose and values aligned to their own. Through the adoption of ESG principles, the industry can head off its age-old problem of attracting top talent.
 
As recognised by the American Business Roundtable, organisations need to develop principles with a purpose. Immediate shareholder value is no longer the sole key driving factor. The adoption of ESG principles into a broader new set of insurance principles will help to deliver a more sustainable industry, with better underwriting results through loss mitigation and risk selection; and ultimately a more sustainable global environment.
 
In Asia however, it is extremely important to maintain balance to avoid pricing consumers out of the market. It remains critical to further close the protection gap through greater insurance penetration. ESG principles in underwriting should not and do not mean pricing yourself out of risks, but also looking at the broader social context. This is where the industry needs assistance from the world leaders in ESG in the developing sconomies across Asia. A 
 
Mr Marcus Taylor is head of reinsurance, Asia Pacific for Ed Broking.
 
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