As we drew our last Insurance NED roundtable of 2020 to a close, we started discussions on an interesting topic that we will no doubt continue in 2021. 

The ‘S in ESG (Environmental, Social and Governance) issues has been a key topic this year, and this time we discussed it in the context of underwriting decisions. 

In the same way that companies apply social considerations when selecting suppliers to work with, we asked insurers if they had started applying social considerations to underwriting new business.

What are firms already doing in this space?

Firms are already doing several things with regards to considering social aspects when underwriting:

• Some firms are actively changing their risk portfolio going forwards by withdrawing from certain business types and taking on other new types of risks.
• Some firms have actively started building relationships with new brokers who are adapting to the changing needs of insurers in relation to ESG issues.
• Other firms have started discussions at a board level on how to start building ESG issues into their assessment of risks that they are taking on.

Some NEDs said they were considering options like applying rate increases for insureds with poor social impacts, while others said they were planning to review policy terms and conditions on renewal for less ‘acceptable’ risks.

However, the consensus was that more needs to be done to address these considerations when underwriting, but there are challenges that come with this.

What are some of the challenges encountered by firms?

Some views were refreshingly honest – it is incredibly difficult to walk away from risks that are profitable and which other insurers may be only too happy to pick up. Taking a stance on ESG issues may even harm your competitive position in some markets. 

On the other hand, there are clear dangers in a strategy that relies on insuring ESG-unfriendly risks over the longer term, given the pace of change in society towards more sustainable business practices.

One NED pointed out that most of society still demands fossil fuels and that there is nothing wrong with insurers supporting those working to meet that demand.  Another noted that there are entire communities whose livelihoods depend on industries such as coal, and that their wellbeing was also a valid factor in the overall debate.

Finally, one NED summarised the views of many by saying that the insurance industry ought to reflect, but not pre-empt, public opinion on ESG matters.

What can you do?

Having heard the NEDs’ views on this topic, here are my suggestions for potential quick wins.

• As a board, discuss where you stand in the debate about insuring ‘green vs non-green’ industries.  Agree your risk appetite and form a risk assessment plan.  The plan can include conditions under which certain risks may be acceptable, eg if the potential insured has plans in place to mitigate some of the social impact they are creating.
• Ensure that you obtain accurate information about your insureds’ activities so that you can accurately assess the ESG risks that they present.  
• Consider having a senior ‘go-to’ person in the business who is invested in the risk assessment plan and can advise underwriters on how ‘socially’ acceptable a risk is, and aid decision making for those risks that are on the fence.
• If you write a lot of your business via brokers, consider ways of getting your brokers engaged in these issues.  They will eventually have to address ESG issues themselves, so it’s worth being proactive and getting this on the agenda.
• Get the views of your workforce on your approach to ESG in underwriting.  Clearly you won’t be able to please everyone, but employees will appreciate being consulted and engaged with on the issue.

Please get in touch with Jinita Shah if you would like to join our next Insurance NED roundtable.