Insurers as influencers: building a more sustainable, responsible, and equitable world

The seriousness with which insurers take Environmental, Social, and Governance (ESG) issues has come under increasing scrutiny in recent years. As both investors and underwriters, insurers occupy a central role in the global economy that gives them significant influence over the business activities of others.

With the increasing risks associated with ESG issues, particularly climate change, there is clearly a need for insurers to think carefully about how they address ESG. According to Aon, two-thirds of the 416 natural catastrophe events of 2020 were not covered by government or private sector insurance. There is also the risk, according to Marsh, that fossil fuel assets held by insurers could become worthless, with major implications for their finances, and that increasing global warming threatens disruption in the mortgage market as mortgages could default if homes become uninsurable.

These issues are well documented, and the challenges widely known to insurers. For example, in its 2020 corporate responsibility report Munich Re committed to stop insuring the construction of new coal-fired power plants or new coal mines and individual risks in industrialised countries, as well as in the bulk of emerging markets too. London Market insurers,  Arch and Tokio Marine Kiln, have refused to  insure the Adani coal mine in Queensland. In other areas of insurance, non-climate ESG issues are also coming to the fore. For example, Josephine Wolff, assistant professor of  cybersecurity policy at The Fletcher School at Tufts University, believes that preventing insurers from paying out after ransomware attacks will disrupt the business models of the groups behind them and end the funding of criminal behaviour.

Whilst action relating to climate change, diversity, and criminality is all to be welcomed another question has to be how insurers can create insurance that aligns with the attitudes of a more environmentally and socially responsible customer base.

According to Euler Hermes, ‘impact underwriting’ is one way that insurers could leverage their position as risk manager, risk carrier, and major investor to drive genuine change. For example, insurers might drive positive changes in people’s lifestyles by offering better insurance terms or services for eco-friendly appliances, cars, and buildings.

It is certainly an interesting concept. As we have seen from the debate around the FCA loyalty penalty decision in the UK, price is a clear driver for consumer behaviour and as sustainable goods become more affordable, insurers could play a role in influencing sustainable purchasing decisions.

Another interesting concept that insurers might adopt comes from the wider finance world. Resilience-financing methods are being developed to try to account for long-term financial risks and benefits that ultimately impact the cost and viability of business investments and decisions. With its expertise in how to understand risk and its deep knowledge of its customers’ business, the insurance industry is beginning to play its part in developing and implementing such structures. For example, resilience financing programmes are being set up whereby businesses or individuals that invest in restoring or preserving natural ecosystems, or other social goods, are rewarded with discounted insurance premiums. This raises new challenges for insurers, as they must ensure that their customers are not just greenwashing investments to their benefit, but through their use of data analysis, fraud prevention and, more recently AI, insurers are well placed to combat such practices.

For insurers, addressing the issue of ESG will require nuanced consideration of a complex array of issues. As insurers develop their ESG positions, the industry ought to embrace its role as an influencer of individual and business behaviour making ESG part of its products and not simply its corporate mission statements.