5 minute read 17 Sep 2021
Colleagues discussing work

How the insurance sector can drive sustainable finance

Authors
Peter Manchester

EY Global Insurance Consulting Leader and EY EMEIA Insurance Leader

Leader in insurance transformation and strategy. Active interest in new entrants. Uses leading-edge technology to transform the customer experience and insurance landscape.

Gill Lofts

EY Global Financial Services Sustainable Finance Leader, EY Financial Services Wealth & Asset Management Leader, Ernst & Young LLP United Kingdom

UK Wealth & Asset Management Leader and Global Financial Services Sustainable Finance Leader. Passionate about creating a legacy in the Financial Services industry and proud mother of two daughters.

5 minute read 17 Sep 2021

Insurers’ influence as FS providers means they can arguably do more than most to integrate long-term ESG criteria into global business.

In brief
  • Insurers should connect ESG clearly to their overall purpose and business strategy. 
  • Insurers should be ambitious and comprehensive in tracking and reporting ESG activities across their business.  

From rising levels of environmental pollution to reoccurring natural disasters, the risks of environmental unrest are growing, which has the potential to hinder fragile recovery in a volatile world.

The role of insurance in sustainable finance

Firms can advance sustainability through their underwriting decisions, their investment choices and by engaging with clients on environmental, social, and governance (ESG) issues.

Indeed, ESG factors are increasingly important in the assessment of the risks to insurers’ assets and liabilities – to the future value of insurance firms’ investment portfolios and to the size of the insurance claims that insurers are subject to each year.

How insurers choose to run their businesses in the face of these risks will affect their competitive positions, climate related litigation and reputations in the marketplace. It will also have an impact on the culture of the firm and may affect employee engagement and, ultimately, the ability to attract and retain talent.

ESG regulation is also looming, which means understanding, measuring, and prioritizing ESG strategy is essential. Insurers must, therefore, rethink their businesses holistically and look across their entire value chain to address ESG-related risk, in a way that helps grow their business, enhance their brand and protect the planet.

There are four key areas where the insurance industry can make a real difference.

1) Create a clear, compelling connection to ESG in your purpose

The 2021 EY Global Insurance Outlook suggests that following the pandemic we’re seeing a renewed emphasis on the purpose of insurance. Insurers are increasingly focusing on taking specific steps to guide purpose-led programs that advance ESG, build customer trust, and promote growth.

Clarifying your business’s purpose in relation to ESG is critical. Creating a clear connection to ESG in your purpose explains why prioritizing ESG must take place and highlights the risks to your business if this doesn’t happen.

But actions—not your words—are what really matter. The strategy you follow to bring your purpose to life should encompass everything from the clients you will accept business from, to the vendors you work with, and your commitments to finding more sustainable ways of running your business.

2) Be ambitious in what you track and transparent in what you report

Transparent, measurable benchmarking allows comparisons at the company, sector and country levels, and will help you identify examples of best practices and areas for improvement.

The recently launched EY Sustainable Finance Index aims to accelerate improvements in sustainability across financial services, by tracing institutions’ progress over time against a broad set of sustainability parameters.

The latest version of the Index looked at the European Insurance sector and confirmed that European insurers currently outperform both their global peers and their banking counterparts on their sustainability disclosures.

Several leading insurers are adapting their products for greater sustainability, aiming to reduce the protection gap, increase loss prevention and support green transition. Examples and opportunities include:

  • Offering incentives for responsible customers’ behavior promoting prevention and energy-efficiency (e.g., special insurance rates for energy-efficient buildings or cars with recycled parts, and travel insurance incorporating carbon offsets) as well as incentivizing (e.g., through significant savings on insurance) industries which implement decarbonizing solutions for their carbon neutral transition
  • Increase support to the energy industry renewable energy construction and generation activities (e.g., construction, property, industrial risks as well as risk management products)
  • Partnering with InsurTechs & other firms, leveraging AI to enhance prevention, claims management experience and insurers’ own risk modelling capabilities
  • Enhancing parametric insurance, (not designed to replace but) to complement traditional insurance programs, to provides more affordable protection and straightforward and transparent claims payment when people need it immediately (e.g., business interruption)

By developing green products – not just greenwashing – you can demonstrate a tactical approach to sustainability. But you should also consider how to go further by embedding ESG factors across your full range of products and services.

3) Role model ESG in your business model

Climate risk must become a boardroom priority and seen as brand enhancing in the fight for new business, and to attract and retain talent. There is a new perspective amongst insurance leaders toward ESG where sustainability ceases to be a problem to be fixed and rather that it is seen as a critical part of their growth strategies.

ESG is changing insurers’ business models. Concerns about the protection gap are partially mitigated by the rise of captives. But the expectation is that business models will change and businesses will cease to operate as they do now – for the better.

Market trend data shows that many progressive insurers are phasing out high-emitting counterparties and divesting from sectors such as coal, while integrating ESG into their investment decision making.

Progressive insurers are reassessing their investments – developing risk appetites based on net zero and implementing carbon reduction pathways. However, more importantly, they are also supporting counterparties in their transition to net zero via feedback in the due diligence process.

At the same time insurers are actively seeking to invest in assets that generate positive ESG outcomes that align to UN sustainability goals.

4) Determine how your firm will constructively collaborate across sustainability policy and initiatives

Given the enormity and complexity of both climate change and sustainability, global cooperation and collaboration is recognized as essential. It will help drive forward effective sustainability legislation and regulation, and contribute to the progress of improved ESG disclosures, reporting and data.

Summary

In recognizing the risks faced by the insurance industry, it becomes apparent that the industry is well placed to live into its purpose helping reduce the impacts of climate change.

Given the insurance industry's history on collaboration there are reasons to be optimistic that the sector can make strides toward net-zero with initiatives like the Net-Zero Asset Owner Alliance, which includes 10 of the world's largest re/insurers.

By focusing on ESG as it relates to their purpose and processes, insurers will be well placed to protect themselves from the risk of climate change and lead the market into a greener future.

About this article

Authors
Peter Manchester

EY Global Insurance Consulting Leader and EY EMEIA Insurance Leader

Leader in insurance transformation and strategy. Active interest in new entrants. Uses leading-edge technology to transform the customer experience and insurance landscape.

Gill Lofts

EY Global Financial Services Sustainable Finance Leader, EY Financial Services Wealth & Asset Management Leader, Ernst & Young LLP United Kingdom

UK Wealth & Asset Management Leader and Global Financial Services Sustainable Finance Leader. Passionate about creating a legacy in the Financial Services industry and proud mother of two daughters.