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.