Like any other sector, the insurance industry is expected to reap significant benefits by adopting environmental, social and governance (ESG) considerations in strategy implementation.
Insurance companies must leverage the opportunities provided by ESG to enhance their growth strategy, future viability, and long-term sustainable dividend distributions to stakeholders.
Environmental, social and governance (ESG) criteria provide an opportunity for insurers to differentiate themselves in the market, build trust with stakeholders, and maintain a competitive advantage.
The overall insurance value chain is an area where insurers can identify opportunities for differentiation from an ESG perspective. Some of these opportunities include:
From an underwriting perspective, insurers should include ESG stress testing in their investment portfolio that includes climate scenario analysis data.
Conducting stress tests would enable insurers to understand the potential impact of ESG on their reserve and capital levels, which would in turn impact product pricing and portfolio selection.
It also allows insurers to better tailor their policies to meet the needs of their customers, giving them a competitive advantage with customers. From a capital and risk control perspective, insurers can apply ESG scenario analysis to understand the levels of capital required for planning purposes.
In addition, insurers can align their investment portfolio with their ESG strategy, including their sustainability commitments and ambitions. For products and pricing, ESG opportunities include developing products that target and address clients’ ESG risks, such as extreme weather events such as floods and droughts.
Insurers can also use policy pricing to incentivize and promote ESG-related activities that encourage clients to reduce their carbon footprint across their operations. From an internal and service perspective, insurers should also leverage ESG opportunities in the areas of net zero emissions, the energy transition, and waste-reducing circularity.
Insurers should also consider ESG considerations in their supplier decisions, such as setting a standard for suppliers that produce no harmful emissions and recording ESG scores. Insurers should also consider setting a sustainable claims management standard for all categories of claims.
Successful integration of ESG criteria across an insurance company should include governance roles and obligations, with clarity on roles and responsibilities.
There should be accountability at all levels of the organization, starting with executive leadership.
ESG principles should be applied to every process and functional area of an insurer, and insurers should make adequate investments towards a data management and reporting strategy, which is essential for internal decision-making and communication with internal and external stakeholders.
