Many insurance company executives believe that being in the business of protecting customers against future risks means they are already pursuing long-term value (LTV) creation, but that’s only partially true. Increasing stakeholder expectations and a rapidly transforming operating environment, accelerated by the COVID-19 pandemic and rising concerns about the impacts of climate change, are changing the definition of success for most industries but are especially resonant for insurers.
Long-term value creation embraces the principles of the environmental, social and governance (ESG) movement to create a sense of organizational purpose that is sustainable and rooted in the interests of all stakeholders. It acknowledges that superior financial returns are required to remain relevant and are best obtained by focusing strategy squarely and sincerely on meeting the needs of customers, employees and society over the long haul.
For insurers, this can include creating products to meet emerging customer needs; promoting employee wellness programs; improving coverage availability for low-income communities; and embedding the effects of climate change more completely into underwriting, investment, and client and vendor selection decisions. For example, some insurers have halted underwriting coverage for new oil and gas projects, making those initiatives more difficult and costly to pursue. The industry collects about $18.5 billion in premiums related to oil and gas projects.¹
Many insurers pay lip service to ESG-related challenges, piloting stand-alone initiatives or doing what is necessary to be compliant. Still, they don’t make ESG core to their organization’s purpose, brand and culture. Supported by meaningful metrics and a fit-for-purpose business model, a long-term value strategy can elevate a company’s brand, enhance its operational resilience and drive profitable growth. To thrive in this more purpose-driven environment, insurers can reframe their strategies around four long-term value pillars: customer, people, society and financial.
ESG-related issues can expose insurers to a variety of reputational and financially material risks that demand attention. For example, the first three quarters of 2021 witnessed a record $104.8 billion in weather- and climate-related losses, many covered by insurance claims. Through the second quarter of 2021, insurers lost an estimated $37.4 billion² due to the pandemic, while civil unrest in 2020 resulted in another $2 billion in losses.
At the same time, scrutiny from investors, regulators and others of how insurance companies incorporate ESG principles into strategy is growing. For example, in March 2021, a group of US senators wrote to the CEOs of large property and casualty (P&C) insurers asking if their “underwriting and investment policies pertaining to coal and other carbon-intensive projects” are consistent with broader sustainability commitments.³
All of this is playing out against a backdrop of rapid technology transformation, changing customer expectations and intensifying competition from InsurTech firms that are making social impact central to their value propositions. For example, one InsurTech firm gives underwriting profits to nonprofits that are selected by customers, creating a stronger, more personalized bond between insurer and insured.⁴
Trust, so critical to the insurance industry success, is often lacking. Customers regularly see headlines⁵ about denied claims and rising industry profits, while concerns about issues like underwriting bias⁶ can pose reputational risks. In the EY 2021 Global Insurance Consumer Survey, 16% of US consumers said they had ended a relationship with an insurer due to a decline in the company’s reputation or reports of corporate misdeeds, while 18% chose an insurer because of a positive reputation.
Increasingly, success is built on trust and creating long-term value by meeting customers’ evolving needs, creating supportive, purpose-driven workplaces; and committing company talent, resources and statures to help address society’s problems.
The kicker: evidence shows that proactive steps, such as lowering a company’s carbon footprint or committing to greater community engagement and transparency practices, can benefit shareholders by enhancing a firm’s financial results. A recent study⁷ by Societe Generale found that insurers that reduce coal underwriting and investment could see valuations rise by as much as 9%.
