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Luis Prato

Luis PratoChief Underwriting Officer, UK & Lloyd’s

June 24, 2022

Supporting the ESG transition, the role of insurance in sustainability

ESG has risen up the corporate agenda and is now a top priority for businesses of all types across all sectors. With the changes needed to achieve more sustainable business models comes changing risk. Luis Prato, chief underwriting officer, UK & Lloyd’s, discusses the role of insurance and the impact on risk profiles and pricing, inherent to this transition.

Original Content: AXA XL

The transition to a greener energy supply and more sustainable ways of doing business is a shared responsibility – both ethically and financially. The actions of individuals and/or consumers will play a critical role in the transition, given the impact they will have on companies’ strategies and business models. Meanwhile, as an insurer, we must play our part in ensuring that we address the global challenge of climate change and recognise the growing desire of our clients, colleagues and shareholders for us to transact and interact with companies that do business in more sustainable ways.

Environmental, Social and Governance (ESG) priorities have increasingly become a strategic part of how companies plan and operate. Clients now share their ESG plans with us as part of their risk submissions, reporting on ESG goals is becoming more common, and stakeholders are demanding information on ESG targets from the companies they work for, work with and purchase from.

The insurance industry has a role to play in supporting our clients as they transition to these new business models. Indeed, this is enshrined in the AXA Purpose: “To act for human progress by protecting what matters”. We want to be long-term partners for our clients, to work alongside them to make the transition; this is, in itself, a form of sustainability.

But while the insurance industry can work as an enabler and help to support our clients as they make these changes, it cannot fund the transition. In future, it might be possible for good ESG to be rewarded in pricing for insurance. But for now, the transition means changing risk profiles. Consequently, rates for some areas of our clients’ business may increase – while they might decrease in other areas, of course. Terms and conditions may change. Retentions may increase.

The vital thing will be for us to work in partnership with our clients, risk professionals, risk engineers and experts across the spectrum, to understand changes in risk and to help to administer and support them.

What is sustainability?

To do this, we need first to ask ourselves – what do we actually mean by sustainability? There is no one-size-fits all answer. Sustainability will mean different things for different sectors, and even for different companies within those sectors. This is why we need to partner with our clients, to better understand their ambitions, goals, challenges – and risk.

ESG policies are broadly defined as the evaluation of a company’s collective conscientiousness for social and environmental factors. There are not yet international, standardised benchmarks for ESG. While these would be welcomed and doubtless useful, we cannot wait around for them to be devised and adopted. To underwrite this business today, we first of all need to have a good understanding of the ESG ethos of our clients – now, and over the coming months and years.

To get there, we need clients to have meaningful measurements of how well they’re doing – and how far they still need to go. We want to understand the key performance indicators our clients set for their ESG strategies and to understand how they index and benchmark their performance against others in their industry.

Already, there are ESG ratings and data-scoring mechanisms to help determine investment and corporate strategies. Many clients are working to science-based emissions targets and are publishing information under the Taskforce on Climate-Related Financial Disclosures, for example.

Some companies use other metrics and data scores to benchmark themselves. We can use these data scores to look at financial performance, but we need to go further and understand what these are used for and what they demonstrate for a particular client and its risk profile. The scores are meaningless without context and nuanced understanding.

How can insurance enable the transition?

As underwriters, when we think about ESG, it’s important to look at the opportunity. Rather than think about what we won’t do – for example, what we will exclude or refuse to cover – we want to think positively about how we can support our clients with their transition.

There are some industries that will have a tougher transition journey than others, because of the nature of their business, and some which are further behind their peers in the move towards a sustainable future, for example. It’s these businesses that need our support even more than those clients already well advanced in their ESG journeys.

That’s why we won’t turn our back on clients that are making meaningful strides on ESG and are committed to transitioning. However, we do need to partner with them to understand the risks and challenges they face in order to develop solutions to support them on their journey.

In any transition there’s risk. The insurer’s role is to administer that risk – to help the transition by engaging with clients, finding ways to quantify the risk, ways to mitigate it and ways to transfer it. Greater use of risk engineering and innovative solutions such as Structured Risk Solutions (re)insurance can help clients to transfer some of the risks inherent in the changes they are undergoing.

We – clients and underwriters – need to move the conversation forward in such a way that sees all parties examine where they are today and where they’ll be in 18 months from now and what they may experience along the way.

This is a journey. And every journey has to start somewhere. Now is the time to work to understand these emerging risks and forge long-term partnerships to ensure that we can meet our ESG goals – together.

First published in The ESG Insurer.

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