Liz Booth examines ever-increasing environmental, social and governance issues facing insurers
A decade ago, if you had asked anyone in the insurance profession what ESG meant, you may well have received a blank look.
Today however, there is far greater understanding of the environmental, social and governance (ESG) issues facing business and the insurance profession alike.
According to preliminary estimates from Swiss Re, global insured losses in 2018 are around US$79 billion (£62.9bn), higher than the annual average of the last 10 years.
This year has started with two cyclones battering the east coast of Africa and decimating swathes of Mozambique -- the first time in recorded history that two such cyclones have hit in one season. The Caribbean hurricane season lies ahead, while in the UK the Environment Agency has warned entire coastal and river communities may have to be abandoned in the face of the effects of climate change.
So, no wonder there is a drive from insurers to build a sustainable future, both in response to climate change, but also in terms of providing a better social environment.
The UN has been pushing this agenda in earnest since 2012 and back in February, more than 200 insurance industry leaders and key stakeholders from across the globe gathered in Munich to raise the insurance industry's ambition in tackling sustainability challenges
such as climate change, social inequality, ageing populations and major health risks.
At the international event, the first-ever insurance industry guide titled, "Insuring for sustainable development: Raising the industry's ambition", was launched.
The guide shows how insurers can develop a systematic approach to managing ESG risks such as climate change, environmental degradation, protected sites and species, human rights and corruption.
It focuses on non-life insurance and includes heat maps indicating the level of potential ESG risk across lines of business and economic sectors -- from agriculture, chemicals, defence, energy, healthcare and technology; to infrastructure, manufacturing, mining, real estate and transport.
Oliver BÃ¤te, CEO of the Allianz Group, said: "Driving a low-carbon and inclusive economy to secure our future only will succeed if all players are truly committed and create measurable contributions."
Christiana Figueres, Convenor of Mission 2020, added: "The latest Intergovernmental Panel on Climate Change (IPCC) report shows that there's a world of a difference -- in terms of adverse economic, social and environmental impacts -- between a world with an average temperature increase of 2 degrees since pre-industrial levels, and one with 1.5 degrees.
"As risk managers, insurers and investors, no industry has the capacity to keep us safe other than the insurance industry."
THE AFRICA EXAMPLE
One of the key initiatives from the insurance profession is to encourage ESG principles in areas most likely to be negatively impacted by climate change. In recent months, the United Nations (UN) has been involved with two major events on the continent of Africa.
Firstly, in Egypt, the insurance industry has agreed a pioneering initiative to develop a national sustainable insurance strategy and action plan -- described as a "roadmap" -- by 2020.
This aims to harness the triple role of the Egyptian insurance industry as risk managers, insurers and investors for economic, social and environmental sustainability.
And then in May, at an event hosted by Continental Re, the first African reinsurer to sign the Principles of Sustainable Insurance (PSI), leading Nigerian insurers agreed to engage with local government authorities in Lagos to explore the development of a "city sustainable insurance roadmap"- a strategy and action plan to help Lagos become resilient and sustainable.
With more than 21 million inhabitants, the bustling megacity of Lagos is the economic, financial and cultural heart of Nigeria, Africa's largest economy and most populous country. Lagos is vulnerable to sustainability risks such as flooding, sea-level rise, coastal erosion, disease outbreak and infrastructure failure.
As part of the need to develop better data and catastrophe risk models and enhance climate risk management, participants also agreed to look into opportunities to develop flood maps for the capital cities of Lagos and Accra in West Africa, and for the Southeast African countries of Mozambique and Mauritius.
THE PRINCIPLES FOR SUSTAINABLE INSURANCE
Launched at the 2012 UN Conference on Sustainable Development, the UNEP FI Principles for Sustainable Insurance serve as a global framework for the insurance industry to address environmental, social and governance risks and opportunities.
Endorsed by the UN Secretary-General, the principles have led to the largest collaborative initiative between the UN and the insurance industry -- the PSI Initiative. More than 120 organisations worldwide have adopted the four Principles for Sustainable Insurance, including insurers representing more than 25% of world premium volume and US$14 trillion (£11.14 tr) in assets under management. The principles are part of the insurance industry criteria of the Dow Jones Sustainability Indices and FTSE4Good. (Source: UN PSI)
THE FOUR PRINCIPLES
1) We will embed in our decision-making environmental, social and governance issues relevant to our insurance business.
- Establish a company strategy at the board and executive management levels to identify, assess, manage and monitor ESG issues in business operations.
- Dialogue with company owners on the relevance of ESG issues to company strategy.
- Integrate ESG issues into recruitment, training and employee engagement programmes.
Risk management and underwriting
- Establish processes to identify and assess ESG issues inherent in the portfolio and be aware of potential ESG-related consequences of the company's transactions.
- Integrate ESG issues into risk management, underwriting and capital adequacy decisionmaking processes, including research, models, analytics, tools and metrics.
Product and service development
- Develop products and services which reduce risk, have a positive impact on ESG issues and encourage better risk management.
- Develop or support literacy programmes on risk, insurance and ESG issues.
- Respond to clients quickly, fairly, sensitively and transparently at all times and make sure claims processes are clearly explained
- Integrate ESG issues into repairs, replacements and other claims services.
Sales and marketing
- Educate sales and marketing staff on ESG issues relevant to products and services and integrate key messages responsibly into strategies and campaigns.
- Make sure product and service coverage, benefits and costs are relevant and clearly explained and understood.
- Integrate ESG issues into investment decision-making and ownership practices.
2) We will work together with our clients and business partners to raise awareness of environmental, social and governance issues, manage risk and develop solutions.
Clients and suppliers
- Dialogue with clients and suppliers on the benefits of managing ESG issues and the company's expectations on ESG issues.
- Provide clients and suppliers with information and tools that may help them manage ESG issues.
- Integrate ESG issues into tender and selection processes for suppliers.
- Encourage clients and suppliers to disclose ESG issues and to use relevant disclosure or reporting framework.
Insurers, reinsurers and intermediaries
- Promote the adoption of the Principles. Support the inclusion of ESG issues in professional education and ethical standards in the insurance industry.
3) We will work together with governments, regulators and other key stakeholders to promote widespread action across society on environmental, social and governance issues.
Governments, regulators and other policymakers
- Support prudential policy, regulatory and legal frameworks that enable risk reduction, innovation and better management of ESG issues.
- Dialogue with governments and regulators to develop integrated risk management approaches and risk transfer solutions.
Other key stakeholders
- Dialogue with intergovernmental and non-governmental organisations to support sustainable development by providing risk management and risk transfer expertise.
- Dialogue with business and industry associations to better understand and manage ESG issues across industries and geographies.
- Dialogue with academia and the scientific community to foster research and educational programmes on ESG issues in the context of the insurance business.
- Dialogue with media to promote public awareness of ESG issues and good risk management.
4) We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the principles.
- Assess, measure and monitor the company's progress in managing ESG issues and proactively and regularly disclose this information publicly.
- Participate in relevant disclosure or reporting frameworks.
- Dialogue with clients, regulators, rating agencies and other stakeholders to gain mutual understanding on the value of disclosure through the principles.