The Impact of ESG on Insurers’ Future Strategy and Business Models

 Environmental, social and governance (ESG) principles have risen with astonishing speed to the top of the strategic agendas for senior leaders and boards in insurance. However, challenges arise from the lack of consensus on the full impact for insurance, as well as uncertainty around the best ways to measure the effect of ESG, and insurers’ progress toward their goals. Furthermore, approaches to adoption vary considerably across the industry, with insurers having a unique opportunity – and responsibility – to help build a fairer and more sustainable future. 

Insurers joining a January 13th, 2022 webinar discussed:

    • The key aspects that need to be addressed to execute an informed ESG strategy, and how to fully embed this across your organisation to avoid siloed efforts

    • The impact of enhanced reporting and tracking on ESG strategy, and the actions that need to be taken to ensure goals are met

    • The importance of clear, transparent communication of ESG purpose and ambition to employees, stakeholders, and customers

Speakers included:

Dr. Ruth Middleton, Chief Risk Officer, AIG Life UK and EMEA Life and Retirement AIG

Eugenie Molyneux, Chief Risk Officer, Commercial Insurance, Zurich

Rob Anarfi, Chief Risk Officer, Beazley

Katie Lennon, Head of ESG, UK & Lloyd’s Market, AXA XL

The event was hosted by EY's EMEIA Insurance leader Peter Manchester who published the following excellent read-out on March 14th, 2022:

The wide-ranging discussion focused on key issues that are on the agendas of senior leaders across the insurance sector. You can watch the full Webinar here, but I wanted to share some follow-on thoughts about the current pace and direction of the industry’s long-term ESG journey. The discussion focused on three main areas:

• Defining a purpose-led ESG strategy that links to the overall business strategy and that is both “bold and possible,” as one of our panelists put it
• Embedding that strategy into products and operations so the organization can deliver results in line with purpose
• How to measure and report on progress toward strategic goals in ways that will engage external stakeholders. 

The dialogue first addressed environmental matters – the E in ESG – which is not surprising given how recently COP 26 had concluded. The industry is increasingly aware of the opportunities associated with decarbonization and “greening” of the global economy. Those opportunities cut right across the strategic agenda, from revenue growth and customer intimacy to product innovation and technology transformation, as I’ll explore in more detail below.

Social and governance matters come to the fore

But, as panelists shared insights based on their firm’s experience, I was struck by their emphasis on the social and governance factors of ESG. Typically, environmental and climate-related matters dominate ESG discussions, primarily because they are the most urgent. But as more senior leaders and boards have conceptualized the risks and opportunities relative to climate change, they are turning their attention to the social issues that have received a lot of media coverage during the last few years. They are also revisiting existing governance models to update them based on today’s conditions. 

 There was much discussion about gender equity in insurance. The consensus among participants is that there has been substantial progress, but that it’s happened slowly. Isabelle Santenac, EY’s global insurance leader, has written about what it will take for the industry’s gender equity ambitions to become reality and why more diverse leadership teams help improve business performance. 

Insurers are taking external action, too, by publishing data on gender and diversity pay gaps, for instance, and engaging with suppliers that embrace diversity, equity and inclusion. While the industry has made progress, much work remains – particularly in ensuring that the benefits of diversity are clear and compelling to all industry stakeholders. 

 Increasing diversity is one way the industry can address the huge skills gap it faces. A large percentage of the industry’s technical experts – including underwriters – in the UK are set to retire in the next few years. Insurers can look to new sources of talent to fill these roles. Insurers should also recognize how commitments to diversity can help attract talent to the industry. Younger workers will be drawn to those firms and sectors that are forward-looking and show leadership in addressing society’s greatest challenges and demonstrate a purpose beyond their own bottom lines.

 There was also considerable discussion of the importance of leadership, governance and culture in affecting change. To some degree, the initial success of ESG strategies will be dependent on clarifying goals and expectations and establishing accountability at all levels of the organization. Chief risk, financial and strategy officers will help ensure each insurer’s ESG vision becomes operational reality. The core question is to define who is responsible for doing what to ensure the organization meets its environmental and social commitments.

 Some insurers have named “heads of ESG” to oversee and coordinate the many different workstreams. The situation is analogous to the early years of the digital era, when insurers named “chief digital officers” to drive change and the adoption of digital tech. Now there are few, if any, heads of digital in place, because product leaders, CTOs, CIOs and others understand the need for and are comfortable managing digital operations. We believe ESG will follow a similar trajectory, with management and governance being fully embedded and intertwined with other senior-level accountabilities and becoming part of the fabric of the organization.

Risk expertise and industry leadership

Returning our attention to the implications of climate change, insurers will take action on multiple fronts, starting with underwriting, new product development and investment priorities. Commercial insurers can shift from their sector-driven approaches as they help all types of businesses reduce their carbon footprint. Similarly, the development of green infrastructure, which insurers can facilitate both by investing in large-scale projects and by covering risk, will benefit all industries, as well as individuals, families and communities around the world. As risk experts, insurers are best positioned to drive large-scale change across industries. 

One panelist commented on the need for the industry as a whole, as well as political and business leaders around the world, to coordinate decarbonization strategies and move in the same direction. Another mentioned the importance of establishing metrics that reflect the long-term nature of the transition to a greener economy. Once they have clearly articulated their ESG strategies and objectives to the market, insurers must define the right measures to evaluate progress toward their goals and show how the scope and extent of their efforts will increase over time. Many insurers are working diligently to capture the data they need to meet emerging standards for ESG reporting. 

Bold and forward-thinking insurers can thrive even as they navigate the significant new regulatory requirements related to ESG and prepare to manage the ever-increasing climate risks. That many insurers were forced to make large and rapid changes to their technology and operations during the pandemic has created optimism about future change among senior leaders. It’s encouraging to see. 

 Getting the ESG strategy right is critical to building on the current momentum, as is embedding it effectively into operations and products. The process of embedding will involve the development of innovative new offerings, like parametric policies, risk assessment services and premium discounts for certain actions (e.g., reduced commuting, eco-friendly construction). But it will also involve simpler steps, such as updating policy language and stipulations that will help customers make decisions and change their behaviors in line with ESG guidelines.  

Moving from business as usual to innovation

As one of our panelists put it, “I shouldn’t have a job in a few years if we succeed in making ESG into what we do every day and putting the right governance framework around it.” In other words, ESG will move from being a set of separate initiatives to become business as usual.

 But to make the most of the innovation opportunities and disruptions associated with ESG, the industry definitely will need more of the type of collaborative dialogue and bold thinking that was in evidence during our recent event with Reuters. The ESG journey will be a long one and insurers have an essential role to play, not just in making their own transitions, but also facilitating successful transitions for nearly every other industry in the world. That requires both a clear strategic vision for the long term and urgent action now, with steps affecting many different parts of the enterprise. We hope to that you will join us in participating in critical dialogues with other industry stakeholders that will drive the industry forward.

Sources: Reuters Events, The Impact of ESG on Insurers’ Future Strategy and Business Models (reutersevents.com);  EY EMEIA Insurance leader Peter Manchester, The ESG journey: where insurers are today and what is ahead | LinkedIn