This blog was initially published in Spanish on the Social Investor website here.
The insurance sector plays a key role in the energy transition, both in terms of who and how they write policy and as investors. And they have sustainability challenges.
At a time of great social and economic uncertainty, the insurance sector is playing a greater role in achieving the transition to a greener and more inclusive economy.
Climate disasters in 2021, such as floods in Australia, Europe, Canada and South Sudan, hurricanes in the United States, China and India, fires and heat waves in the United States, droughts in Africa and Latin America… have been a litmus test for the sector worldwide.
According to Swiss Re Group According to estimates, around $270 billion in losses were due to natural disasters. Of this amount, less than half, $111 billion, was insured and represented the fourth highest payout since the Swiss Re Institute, the insurer’s research arm, began keeping records in 1970. Is this an exceptional event or the new norm?
Unfortunately, it seems to be a fact of life that is increasing in frequency and severity. The World Meteorological Organization reports that floods, heat waves and wildfires have increased fivefold over the past fifty years, resulting in incalculable environmental costs, in addition to the loss of more than 2 million lives, and an economic impact of more than $3.64 trillion.
With this data, and current trends in mind, insurers are reformulating pricing models to accommodate these events.
Repeated and increasing natural disasters significantly increase the risks to protected assets, which also increases the cost of coverage and policy premiums.
According to KPMGthis situation could lead to a failure of the model, amid regulatory restrictions, rising premiums and doubts about whether individuals and organizations can afford insurance in increasingly catastrophic areas where premiums have risen exponentially, as is already the case in the United States.
According to CapgeminiOver the past four years, approximately 340,000 customers in fire-prone areas of the United States have been classified as “uninsurable” by most major insurers.
This is a decision made based on the simple risk-benefit equation, but does it take into account the impact on customers and society as a result of the insurer’s actions? We should not forget that insurance protection is a prerequisite for many activities of companies, financial market participants and households.
These types of actions cast doubt on the credibility of insurers’ overall purpose: to take risks to meet the needs of people and organizations when they are needed, thus contributing to social and economic progress.
Companies must identify, manage and communicate the negative consequences of their decisions, not avoid them or create barriers.
How can insurers reshape their role and impact, both as risk managers and institutional investors, in a time of transition like now?
They are certainly in a unique position to contribute to comprehensive ESG management, in addition to acting as a traditional risk prevention provider. In other words: they can not only protect, but also stimulate the transition to a more sustainable economy.
Because of their influence, prestige, financial capital, experience and the data they manage, they can work with insured and invested organizations to improve their resilience to socio-ecological events, while also improving the efficiency and profitability of the insurer itself.
Sustainability remains a challenge
However, to play this role, they must have an adequate and up-to-date assessment of ESG risks; analyzing and monitoring the potential social and environmental impacts on companies and, conversely, of companies on the environment and society; design mitigation or compensatory measures; and finally, ensuring timely, two-way, accessible and clear communication.
Unfortunately, most insurers still show poor internal management in terms of sustainability: 50 out of 66 MSCI World insurers are excluded from the MSCI World SRI due to their low ratings.
Although there are differences between regions, it is 92 percent significant of the American insurers surveyed by Conningcompany reputation was the main reason for including ESG factors in their investment decisions, and that 79 percent had only recently integrated them, less than two years ago.
There is a lot of imbalance in the management of ESG factors, with the environmental aspect being addressed the most. Strict regulations, risks of lawsuits and social pressure are drawing attention to this area, even though it is still at a very early stage:
- Major insurers and reinsurers announced the creation of the Net-Zero Insurance Alliance, committing their portfolios to achieve net-zero greenhouse gas emissions by 2050. This can have a ripple effect across sectors, especially if science-based targets are used. It is clear that the challenge is to translate commitment into action, measuring and communicating the impact and progress of this strategy.
- A growing number of insurers will limit coverage for companies that build or operate coal mines and power plants. This is a first step that focuses on exclusion, but does not address the problem or consequences of limitation. It must be supplemented by actions aimed at achieving the transition of the insured’s activities.
- New products are emerging in the form of discounted insurance plans for customers who adopt sustainable practices to reduce energy and resource consumption. This includes discounts for responsible driving, for insuring hybrid cars, or for insuring efficient buildings or buildings that generate renewable energy.
However, the S aspects should not be neglected. Social issues have also become more relevant since the #MeToo and Black Lives Matters movements, which have shifted focus to aspects of diversity, equality and inclusivity. Additionally, cybersecurity and the ongoing disruptions in supply chains require greater attention to social issues.
It is true that the current context is plagued by major challenges that entail risks from an ESG perspective: outbreaks of pandemics, inflation, geopolitical conflicts, energy transition, social manifestations, new technologies…, but at the same time, all these challenges reinforce the need for insurance .
The sector thus becomes an important lever for the recovery and transformation of the economy, industry and society. Depending on how the management of ESG factors is integrated, both in insurance and in investments, this transformation will be more sustainable and therefore more resilient.
In the words of Pilar González de Frutospresident of Unespa, “a robust insurance sector guarantees the mitigation of any economic consequences and places the economy in a better position to face challenges”.