Isabelle Santenac, EY global insurance sector leader, looks at the role the insurance sector can play in addressing sustainability challenges

Isabelle Santenac, EY

Sustainability is the talk of the industry, with the shift towards a greener global economy generating news headlines on a daily basis.

Regulators are increasingly asking insurers to integrate the consideration of climate risks into their governance structures.

During a recent panel co-hosted by EY and the International Institute of Finance, senior leaders from prominent (re)insurers shared bold ideas about the industry’s role in addressing climate change. 

Alongside highlighting the complexities of sustainability, that discussion confirmed the broad consensus about the need for the industry to engage and act in a more coordinated fashion. 

With significant funds to invest, a huge role to play in the economy and a commitment to protect society against risks, the insurance industry is well positioned to influence behavioural change and accelerate the transition to carbon zero.

One participant summed up the delicate balance insurers must strike this way: the industry has an obligation to help accelerate the transition to a net-zero economy, but must also continue to make money. 

The good news is that these two objectives are not as contradictory as they once seemed. There is increasing recognition that sustainability is a critical market-driven issue, given that only 35 percent of climate-related economic losses in Europe are insured today. This is not a purely regulatory matter or, as some sceptics suggest, a public relations exercise.

The scope of risks and opportunities require strategic guidance from the highest levels of an organisation. From product development and underwriting to investment plans and risk management, insurance leaders must simultaneously define their big-picture strategies alongside implementing practical actions. To navigate this complex challenge, insurers should consider the following four actions. 

1.       Lean into purpose to shape the strategy 

As detailed in EY’s 2021 Global Insurance Outlook, sustainability is an issue that speaks to the heart of the industry’s purpose. 

With multiple storms once considered “once-in-a-century” now occurring annually, society needs insurers’ unique knowledge of catastrophic risks and ability to model and manage them. 

Insurers must engage with other sectors and regulators to develop solutions for risks that are currently uninsured.

Within commercial lines, for example, insurers must identify and prioritise products that address both the physical risks of climate change and help “brown” customers transition to a greener economy.

A clearer purpose on the issue of sustainability also represents an opportunity for insurers to engage younger generations of consumers and professionals who may be apathetic toward the industry.

During a recent EY webinar, when asked about the primary drivers in addressing sustainability and social issues, C-level insurance leaders most frequently cited their “employees and customers”.

In the age of ESG, purpose-led strategies are critical in developing and refining strategic frameworks that generate long-term value for a broad range of stakeholders.  

2.       Create meaningful metrics to measure progress

“How do we measure our progress and performance?” is one of the most frequently asked questions about sustainability and ESG. 

Many insurers are looking to identify the right metrics from a business perspective, in addition to those necessary to meet the requirements of investors and regulators.

While many frameworks for reporting have emerged, there is progress toward a common language and standardised disclosures. 

For example, the Task Force on Climate-related Financial Disclosures provides guidance on how firms can effectively disclose climate-related metrics, while the Sustainability Accounting Standards Board (SASB) offers industry-specific standards for 79 industries in 11 sectors. 

The Global Reporting Initiative (GRI) is another international organisation that provides a global common language for businesses to report their impacts. 

A recent announcement from the SASB and GRI describes how their standards complement one another and can be used in tandem – a significant step toward harmonisation.

Insurers are increasingly evaluated by their ESG commitments, a trend that will only accelerate. 

Rating agencies and institutional investors have begun to include ESG inputs in their valuations of insurers and reinsurers. Thus, the industry must share the right ESG data with the market.

It is not just about disclosing the carbon position of the company, but rather explaining the efforts and improvements across the entire value chain and relative to clearly articulated ESG strategies. 

Given that ESG scores have the power to move stock prices, transparency and reporting may become competitive advantages. 

For insurers to manage sustainability performance, they must first measure it. As a result senior leaders are prioritising the development of meaningful metrics. 

During a recent EY webinar, insurance leaders cited “setting priorities and tracking progress” as the most urgent actions they need to take related to ESG. 

3.       Get the governance right 

An issue as complex as sustainability does not easily map to traditional board structures. 

Multiple committees – including the risk, audit and investment board representatives – may play a role in ESG oversight. 

Some insurers may look to establish dedicated sustainability committees. While there’s no easy governance formula, it’s critical that the board oversees sustainability holistically and asks challenging questions.

Several initiatives can be taken to develop holistic oversight of sustainability issues: 

  • Assessing the sustainability strategy in terms of growth potential and alignment to purpose

  • Supporting management to promote the strategy with key stakeholders (e.g. employees, investors, customers)

  • Ensuring that both physical and transition risk are reflected in the risk appetite and that risk management approaches are robust 

  • Confirming that sustainability reports leverage appropriate standards and are supported by strong controls 

  • Tracking how sustainability programmes across the company align with overall strategy and purpose, as well as any commitments the company has made

  • Instilling ESG objectives into the compensation models of key company leaders

Boards and senior leaders must take a broad view when creating a framework to oversee sustainability, both ensuring the company takes action to protect value in the near term and creates more value for stakeholders in the long term. 

4. Emphasise education 

Many in society still have limited understanding of climate risk, and insurers have an important role to play in clearly communicating what is at stake and highlighting what individuals, companies and communities can do to mitigate their own risks. 

For instance, they can work with policyholders to avoid buying homes or building factories in flood-risk zones. In this way, the industry can position itself as a partner in efforts to adapt to climate change. 

Through education, insurers can demonstrate the value of their offerings and strengthen customers’ trust in the industry. 

Better customer understanding of the risks will lead to better decisions. With governments struggling to address climate change, more consumers expect big companies to get involved. 

Consumers want to do business with companies that hold similar values. The same is true of employees – they want to work for companies that share their values and offer more than just a pay cheque. 

Education can be baked into products, too. Insurers can offer incentives or discounts to promote specific behaviors, such as buying electric vehicles or driving less often. 

Similarly, new risk analysis and prevention services can help commercial customers understand their exposures and options for mitigating them (e.g. redesigning operations for increased resilience and redundancy). 

Making sustainability real through tangible action

Insurers can no longer take a “wait-and-see” approach to sustainability.

Carriers can provide clear guidance for shaping strategies while investor and regulatory expectations are useful prompts for near-term actions, such as defining metrics and creating transparent reports. 

The time has come for insurance C-suite leaders and boards to proactively tackle sustainability and climate change risk. These four steps represent a very good place to start.