ESG and the Future of Underwriting

A recent report from leading insurance provider Marsh has highlighted that Environmental, Social and Governance (ESG) factors will play a larger role in the future of underwriting. The survey of 30 insurers represented a significant cross-section of the UK insurance market, and revealed that the ESG landscape is evolving quickly:

“Environmental, social, and governance (ESG) is increasingly impacting insurers’ portfolios and will play a bigger part in future underwriting strategy. As UK companies grow in their understanding of ESG and strategically approach risk mitigation, insight into how insurers perceive ESG risk is essential.”

Climate change is already said to be responsible for some of the more unusual weather we have experienced around the world in the last few years, and as the global temperature continues to rise, we can expect to see more frequently unpredictable and intense conditions. This year alone, we have seen temperatures hit record levels in the UK, resulting in droughts and wildfires over the summer months. Most recently, we have also seen the devastating effects of the Category 4 Hurricane Ian in parts of the United States and the Caribbean.

Without a significant turnaround in this trend, we will almost certainly see more regular wide scale damage, such as farming losses from drought or wildfires and property damage from flooding and storms, or worse. The insurance industry is in a unique position to challenge the current procedures of calculating and predicting risk before it becomes unmanageable. Unless the industry starts setting an example in highlighting the importance of sustainability, it will become increasingly difficult to provide adequate insurance to cover these types of claims.

With the cost of living rising and the possibility of a recession, “not all underwriters are currently considering ESG factors” and many firms are likely to have their ESG plans on hold while they prioritise preparations for the months ahead. As Marsh’s report states: “within certain industry and segments of the portfolio, ESG is yet to make its way to the forefront.”.

In the report, Marsh explains that it has conducted similar conversations with carriers outside the UK and found that the current lack of a unified approach is “a common point globally”. 27% of insurers responded that they expected that ESG would have positive cost of capital implications moving forward, as well as believing that some form of unified market approach could be envisioned in the future. However, 56% were still unsure of the implications at this stage, and this ambiguity could be contributing to businesses’ uncertainty on how to implement their own ESG plans.  

Sustainability through Action

When considering plans for an ESG strategy, firms will need to analyse their current models and how they can be improved for sustainability. This would include: 

• Identifying risks in relation to ESG factors
• Reviewing existing risk and governance strategies
• Implementing a risk and resilience framework,
• Managing incidents and learning lessons

Firms should consider how educating customers on ESG can be beneficial to both parties in the long run. By identifying their exposures and providing options for mitigating them, firms can, in turn, provide incentives to those who are able to demonstrate meaningful and favourable ESG metrics.

Like most things, there is not going to be one single approach for all products and services. There is going to be variability in approach, ‘appetite’ and application across product lines and regions, particularly in regions where risk levels are higher than others. Firms will need to demonstrate flexibility and resilience in these areas if they are to stand out from their competitors.