Insurance industry plays key role in promoting economic, social and environmental sustainability

Anna Triponel

August 24, 2020

The UN Environment Programme’s Finance Initiative (UNEP-FI) has released the first-ever insurance industry guide on ESG issues. The guidance, Managing Environmental, Social and Governance Risks in Non-Life Insurance Business, was developed as part of UNEP-FI’s Principles for Sustainable Insurance (PSI) Initiative launched in 2012 as a collaborative initiative between the United Nations and the insurance industry. These principles “serve as a global framework for the insurance industry to address environmental, social and governance (ESG) risks and opportunities—and a global initiative to strengthen the insurance industry’s contribution as risk managers, insurers and investors to building resilient, inclusive and sustainable communities and economies.” The guidance was developed in the context of increased focus on “risk managers, insurers and investors”, as “the insurance industry plays an important role in promoting economic, social and environmental sustainability—or sustainable development.”

At a high-level, companies who sign onto the Principles for Sustainable Insurance commit to the following four principles:

  1. “We will embed in our decision-making environmental, social and governance issues relevant to our insurance business”
  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”
  3. “We will work together with governments, regulators and other key stakeholders to promote widespread action across society on environmental, social and governance issues”
  4. “We will demonstrate accountability and transparency in regularly disclosing publicly our progress in implementing the Principles”

The PSI guidance was developed over the course of several years drawing on insights from insurance industry leaders, NGOs, investors, regulators, brokers, underwriters, risk engineers, loss adjusters and academia. Perspectives were gathered through a survey on ESG risks in infrastructure, over 50 interviews with senior experts from more than 30 organisations, a survey of over 200 individuals in the insurance sector, a public consultation with key stakeholders and takeaways from PSI panels and events.

The objectives of the guidance are to:

a. “Provide optional guidance to insurance industry participants in developing approaches to assess ESG risks in non-life insurance business transactions, particularly industrial and commercial insurance business

b. “Support clients, intermediaries and other stakeholders in facilitating ESG-related information which might be required during the ESG due diligence of transactions”

c. “Highlight the materiality of ESG risks to various lines of business and economic sectors, including characteristics which might affect the ability to assess and mitigate such risks”

d. “Address growing concerns by stakeholders across society (e.g. NGOs, investors, governments) on ESG risks and articulate the peculiarities of the insurance business”

e. “Demonstrate the valuable role the insurance industry plays in the global economy”

Actions for insurance companies to manage ESG risks

The report shares eight core steps for insurance companies to manage their ESG risks and includes key questions for insurance companies to ask themselves in this process.

Source: UN Environment Programme Principles for Sustainable Insurance Initiative, Managing Environmental, Social and Governance Risks in Non-Life Insurance Business (June 2020)

These eight steps are:

  1. “Developing your ESG approach” using heat maps to identify possible risks and the likelihood (the guidance includes two optional heat maps as a starting place for insurance companies). Following initial risk assessment, “ESG decision-making processes can be aligned on certain issues with risk-based premium calculations, although these are generally separate but complementary processes. The alignment and coordination internally between these processes are important considerations in developing the ESG risk appetite of your organisation.”
  2. “Establishing your ESG risk appetite” by determining which areas pose the most relevance and risk for the business, which may be influenced by “a number of natural determinants which will help establish your focus, such as countries of operation and types of insurance business you are involved in.” This process should involve insurance underwriters and other stakeholders, including those potentially “in scope” for identified ESG risks. The guidance points out that insurance companies should consider the broader landscape of the countries where a given risk may occur, as factors like endemic human rights abuses, environmental issues or poor regulation can increase the severity of the ESG risk.

3. “Integrating ESG issues into your organisation.” The PSI global survey of insurers found that companies take a variety of different approaches to embed consideration for ESG issues. Some examples include:

a. Developing “a unique ESG governance policy framework or similar structure which details roles, responsibilities and processes.”

b. “Integrating ESG issues into the existing risk framework of organisations” in order to more easily map ESG risk onto well-developed frameworks already in place within the organisation.

c. “Integration into the underwriting standards and guidelines of the organisation often allows the best uptake of ESG issues, and, at the least, might cross-reference any additional ESG governance elsewhere.” However, this might involve tailoring ESG factors to meet the “very specific criteria” of underwriting standards.

d. “Alignment of ESG approaches within different parts of an organisation” in order to ensure consistency of an ESG approach.

4. “Establishing roles and responsibilities for ESG issues.” The guidance points to two common trends within insurance companies: “[T]here is a desire to empower insurance professionals to make decisions, and to minimise the resource impact on the business due to additional new processes.” Insurers can leverage these trends by assigning clear roles and responsibilities within the existing organizational structure. For example, senior leadership should set the organisational commitment to ESG risk management from the top and consider forming a leadership committee to oversee implementation of ESG risk frameworks; underwriters can play a role in identifying ESG risks and should receive specific training on relevant ESG issues; risk managers can contribute by “overseeing transactions and the risk appetite for certain businesses or countries of operation”; and communications managers can help identify and manage reputational considerations that may influence the ESG risk management approach.

5. “Escalating ESG risks to decision-makers”: “As the roles and responsibilities for ESG issues are developed, it is important to define the escalation route to decision-making. It is highly likely that ESG risks will be detected, needing senior-level management review.” Organisations should formalize systems to escalate ESG risks quickly, ideally by integrating them into existing risk management structures. Where ESG risks may not be mitigated, escalations should “provide the decision-maker with the business case for proceeding with the transaction as well as the ESG risks associated with the transaction.”

6. “Detecting and analysing ESG risks.” Insurers may face challenges in this because “[m]any insurance industry participants are not yet fully digital in their underwriting processes, and many insured customers are state-owned enterprises or SMEs with limited publicly available information.” As a result, it can be difficult to obtain thorough information to identify potential risks proactively. The guidance recommends relying on a variety of tools and resources to identify potential risks, for example screening tools for ESG and reputational risks of particular companies, sectors and geographies, and relying on reports from NGOs, trade unions and other stakeholders.

7. “Decision-making on ESG risks” should incorporate a few different considerations, such as “how severe you believe the ESG risk is, and if this is a regularly occurring issue within the company or project”; “the stage of development of the country where you are doing business, and if this might influence your risk tolerance on certain ESG issues”; and whether “the client or project has taken action to remedy or mitigate the ESG risk, which might make it acceptable.” The guidance also underscores that under the UN Guiding Principles on Business and Human Rights, insurers have a responsibility to conduct adequate due diligence on potential human rights risks in their business, including whether they may be linked to abuses through their business partners. Insurers should look to the UN Guiding Principles to understand the scope of their responsibility to respect human rights and to formulate appropriate responses to any risks identified.

8. “Reporting on ESG risks” and monitoring the results of ESG risk assessments and actions taken will help insurers to assess their own performance on these issues: “Understanding the balance between the number of risks referred and the number which present an ESG risk for the organisation should help determine if your materiality thresholds are set appropriately (e.g. too sensitive with too many risks being escalated by underwriting).” In addition, publicly reporting on ESG risk assessment systems and implementation is an important tool to build transparency with key stakeholders; the insurance industry can follow the approach that the banking sector has taken to reporting regularly on their ESG performance.

“The benefits for companies taking an active role in developing an ESG approach not only helps mitigate reputation risk to their organisations and manage societal expectations, but will also help them capitalise on developing understanding of the financial benefits of clients with strong ESG performance. Stronger internal ESG expertise can lead to a competitive advantage in engaging and supporting clients. Furthermore, as companies around the world strive to support the SDGs, an active ESG approach can be a source of engagement for employees in an increasingly challenging market to secure and retain the next generation of talent in the insurance industry.”                      

UN Environment Programme Principles for Sustainable Insurance Initiative, Managing Environmental, Social and Governance Risks in Non-Life Insurance Business (June 2020)

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