The villain of the piece - insurers cannot bear the risk of ESG change alone

This article first appeared in Insurance POST, October 2021

Insurers have the opportunity to help drive global change but they cannot do it alone, blogs Kennedys partner Fleur Rochester.

Insurers have been urged to “aim higher” in their efforts to effect environmental, social and governance change in the wake of COVID-19. While the rallying cry is unarguably laudable, most insurers are emerging from the pandemic feeling battered and bruised and, for some, providing cover for the pandemic was a challenge too far.

With restrictions easing, the thoughts of those still standing now turn to how to operate efficiently and successfully in a landscape irreversibly changed. Insurers can not only foster the innovation and progress which follows each new crisis, but how they can influence change to slow the frequency of catastrophic events in the future and avoid the ‘double-whammy’ of climate-related damage to both the value of their investments and to their property and casualty underwriting profitability.

Our July 2020 report on the London Market Group London Matters 2020 report predicted key trends and challenges for insurers, most of which are a result of progressively turbulent times for us all: significant losses arising from the increased frequency and intensity of weather-related disasters, the threat of future pandemics, Brexit, an increase in political risk claims arising from extreme political figures and bitter trade wars, pricing/profitability challenges brought into sharp focus by the Lloyd’s performance review and a lack of regulatory support in London for the growth of alternative capital. These challenges remain.

Statistics from Insurance Datalab confirm the top five Lloyd’s managing agents fell into an underwriting loss of £840 million in 2020 (up from £97.4 million in 2019). And nobody was surprised.

The vision of the UN Environment Programme recognises that insurance can help enhance risk management, absorb climate-change related financial shocks and de-risk the implementation of cost-saving renewable energy and energy-efficient infrastructure. One of the main principles for sustainable insurance collaborative initiatives is transitioning insurance and reinsurance portfolios to net-zero emissions by 2050. Unep maintains that better management of ESG issues by insurers will improve the industry’s contribution to a resilient and sustainable society, while at the same time recognising that the changing risk landscape is impacting on the industry’s viability and that the size and complexity of ESG issues means that widespread action across society is needed, in conjunction with innovative and long-term solutions.

The clear message of Unep is that widespread action to tackle ESG issues through collaboration between insurers, governments, regulators and other key stakeholders is needed, and fast.

The Financial Conduct Authority test case demonstrated the benefits of insurers working collaboratively with their competitors, regulators and assureds. The business interruption coverage question was answered quickly and cost-effectively. The battle lines between insurers and their assureds must continue to be erased through the provision of cover which is clear in its scope and properly priced.

Going forward, government involvement will be key. Insurers cannot be expected to write risks which are not profitable and, indeed, syndicates subject to Lloyd’s governance will continue to be encouraged to abandon underperforming classes. As previously demonstrated by the creation of mutuals Pool Re and Flood Re, government involvement will help insurers to withstand the financial burden of significant catastrophic events. Innovative solutions to pandemic losses are emerging. In response to COVID-19, Lloyd’s has partnered with the UK Government to offer at least £750 million of support to the events sector via the Live Events Reinsurance Scheme. As a result of this collaborative approach, many festivals and other live events are now in train.

Insurers repositioning themselves as allies of other stakeholder groups demonstrably leads to better outcomes.

The next steps of the global recovery are a chance for insurers to drive positive change by continuing to act in collaborative ways – rather than being seen as the last line of defence. Focusing on collaborative ESG strategies will generate a commitment to positive change, supported by innovation, resulting in improved products.

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