How ESG Will Influence Creating Insurance Product Portfolios

Introduction: ESG and Insurance

In recent years, Environmental, Social, and Governance (ESG) factors have gained traction across various industries, reshaping corporate strategies, investment decisions, and consumer preferences. Bloomberg Intelligence gauges that, by 2025, ESG-related investments will cross $50 trillion.

The insurance industry, traditionally focused on risk assessment and mitigation, is not exempt from this paradigm shift. The shift towards ESG in insurance heralds a new era of innovation, risk management, and stakeholder engagement, wherein insurers must navigate environmental risks, uphold social responsibilities, and adhere to robust governance standards.

Rather than viewing this shift as a challenge, insurance companies can capitalize on it by integrating ESG principles into their operations, including the creation of product portfolios.

In this article, we delve into how ESG considerations, particularly environmental ones, are influencing the development of insurance product portfolios, as well as the broader implications for the industry.

Why Align Insurance Products with ESG?

The gains to be had from aligning insurance products and processes with ESG demands are multifaceted.

On one side lie customers. 88% of consumers display increased loyalty to businesses that advocate for ESG-related issues. Furthermore, 76% of consumers would discontinue their relationship with organizations that disregard employees, the environment, and community well-being.

In terms of investments, 63% of the time, ESG factors led to positive impacts on equity returns, from the perspectives of both momentum and tilt, according to a survey by McKinsey.

In another survey by PwC, 60% of asset managers reported that ESG investing led to higher yields than non-ESG equivalents.

The commercial potential of ESG in insurance stems primarily from the escalating demand for ESG-aligned products. Individuals seek financial products that resonate with their environmental and ethical values, while corporate clients aim to mitigate their Scope 3 emissions, which arise from actions related to assets beyond the direct ownership or control of the reporting entity.

Investing in ESG product alignment presents a compelling proposition for insurers. Not only can it lead to heightened premiums and profits by appealing to ESG-conscious customers, but it can also contribute to a reduction in insured emissions.

This reduction, in turn, can attract inward investment and foster greater appeal among ESG-conscious clientele.

How Can Insurers Align Products With ESG?

There are, broadly, three ways to align insurance products and processes with ESG.

ESG in the Underwriting and Risk Assessment Processes

According to the UNEPFI, there is a growing number of insurance industry participants who are actively incorporating ESG risk factors into their risk assessment and underwriting processes.

By integrating environmental, social, and governance factors into their risk models, insurers can more accurately assess the potential risks associated with policyholders and assets.

For example, insurers can consider factors such as climate change resilience, social impact, and corporate governance practices when evaluating risks. This enables insurers to offer tailored insurance solutions that address ESG-related risks and provide value to customers.

Specialized ESG-Related Insurance Products

Another approach to incorporating ESG in insurance is to offer specialized ESG-related products.

These products are designed to address specific ESG-related risks and opportunities faced by businesses and individuals.

For instance, as environmental disasters persist, governments frequently offer aid and subsidies to mitigate the impacts of events such as hurricanes, earthquakes, and tsunamis, aiming to bridge the protection gap.

However, as the expenses of these relief efforts burden taxpayers and potentially encounter bureaucratic obstacles, there arises an opportunity for the insurance industry to introduce supplementary and alternative solutions to government relief packages.

For example, insurance firms could innovate by offering quicker payouts or opt-out alternatives in high-risk regions to ensure comprehensive coverage.

Similarly, insurers can cover social risks, such as workplace diversity and inclusion initiatives or community engagement programs.

By developing ESG-specific insurance products, insurers can cater to the growing demand for sustainable insurance solutions and differentiate themselves in the market.

Investment Strategies

Insurance service providers can align insurance products with ESG by incorporating ESG considerations into investment strategies.

Many insurers manage significant investment portfolios, and integrating ESG factors into investment decisions can have an impact on overall ESG performance.

Insurers can allocate capital to investments that align with their ESG objectives, such as renewable energy projects, sustainable infrastructure, or socially responsible companies.

By aligning investment portfolios with ESG principles, insurers not only support sustainable development but also strengthen their overall ESG profile.

Implications for Insurance Product Portfolio Creation

The integration of ESG criteria is reshaping how insurers design and manage their product portfolios. Here are some key ways in which ESG considerations are influencing the development of insurance offerings.

ESG-Driven Insurance Opportunities

Insurers are developing products that address emerging risks and societal needs related to ESG.

As an example, with the backing of reinsurers, insurers are well-positioned to conduct risk assessments and underwrite renewable energy ventures. By offering coverage and financial security to investors, lenders, and project developers, they can promote investments in green energy infrastructure and foster the expansion of renewable energy capacity.

Given the uncertainty surrounding the long-term output of renewable energy projects, reinsurers, working in conjunction with insurers, could offer performance guarantees.

This would involve assuming risks associated with potential underperformance, such as projects yielding less power than expected. Such an approach would help stabilize returns for investors, rendering these projects more appealing for long-term financing.

By supporting sustainable initiatives, insurers can align their business objectives with environmental objectives while providing value-added solutions to clients.

Risk Mitigation and Resilience

Environmental risks are also financial risks.

ESG integration enables insurers to better assess and mitigate risks associated with environmental and social factors.

The rising severity and frequency of weather-related events raise concerns about exposure to climate-related physical risks. Furthermore, there is growing apprehension regarding transition risks, particularly the anticipated surge in carbon prices. S&P Global forecasts that carbon prices could escalate by over seven-fold by 2030, at $120 per metric ton, to align with the objectives of the Paris Agreement.

By incorporating climate risk modeling, insurers can more accurately price policies and allocate capital to areas less vulnerable to climate-related perils.

Moreover, insurers are incentivizing policyholders to adopt risk-mitigation measures, such as installing resilient building materials or implementing disaster preparedness plans, through premium discounts and incentives.

Socially Responsible Investment (SRI) Products

Insurers are catering to the growing demand for socially responsible investment options by offering SRI products within their portfolios.

These products allocate capital to companies that demonstrate strong ESG performance or adhere to specific ethical criteria.

By aligning investment strategies with client values and preferences, insurers can attract socially conscious investors and contribute to sustainable development goals.

Regulatory Compliance and Reporting

Regulators are increasingly incorporating ESG considerations into their oversight frameworks. They are mandating insurers to disclose ESG-related information and integrate these factors into their risk management processes.

Having said that, many insurers are uncertain of what regulators are demanding. According to a survey by PwC, 25% of global insurers reported that the main challenge in fulfilling their ESG agenda was understanding ESG guidelines and regulations.

Insurers must stay abreast of evolving regulatory requirements and demonstrate their commitment to ESG principles through comprehensive reporting and compliance measures.

Indeed, some insurers are taking a step further and forging public-private partnerships with local governments, regulators, and policymakers to tackle financial inequalities, devise solutions for forthcoming climate or pandemic-related risks, and enhance accessibility to cost-effective healthcare.

By proactively addressing regulatory expectations, insurers can mitigate compliance risks and enhance their reputation as responsible stewards of capital.

Conclusion

The incorporation of ESG in insurance product portfolios represents a fundamental shift in how insurers assess risks, create value, and engage with stakeholders.

By embracing ESG principles, insurers can enhance their resilience, drive innovation, and contribute to sustainable development goals. Successful value creation occurs when ESG efforts, business strategy, and goals are aligned. Insurers should ask themselves where their competitive advantage lies and how they can create an impact outside their organization.

However, realizing the full societal potential of ESG integration requires a concerted effort to overcome data challenges, enhance risk assessment capabilities, and foster collaboration across the industry.

As insurers navigate this transformative journey, they have an opportunity to not only mitigate risks but also create positive societal impact and build a more sustainable future.

However, the workload required for these purposes will be heavy. Silverskills can ease insurers’ burdens with our insurance services, including property and casualty, life and annuity, and auto insurance.

Ready to begin transforming your processes? Contact us now.