Un­der­writ­ing

Section 5 ‘Regulation and sustainability’ discussed risk management in relation to sustainability risks in the insurance industry. A distinction needs to be made between risk management at a corporate level and underwriting specific risks, i.e. putting risk management into practice in operations. Taking on risks is an intrinsic part of being an insurer.

Insurance companies assume risks and compensate individuals for any financial losses using premiums paid by all policyholders, who collectively form a community of the insured.

‘Underwriting gives insurance companies a highly effective tool for encouraging companies to be more sustainable.

Salomè Vogt, Former Head of Avenir Jeunesse at Avenir Suisse

When it comes to sustainability, the question arises as to how insurers should take on sustainability risks. Which risks, such as climate impacts, should be assumed? Which should be completely excluded because they are insurable or because insurers are unwilling to take on the risk on ethical grounds or due to reputational risk?

If someone needs to be insured against a risk and the insurance product does not prohibit this risk from being covered, the insurer carries out a risk assessment at the underwriting stage. This assessment evaluates the specific risk presented. To date, this part of the underwriting process has mainly focused on the acceptability of the risk from the perspective of the insurer in question.

Insurance companies have become increasingly sensitive to reputational risks in recent decades. Although nonlife and reinsurance policies are usually concluded for one year, it is common for them to be extended, meaning insurance companies and their customers can have relationships lasting decades. Given the length of these customer relationships, assessing reputational risk is a challenging task: The decisionmaking process needs to take into account not only the current societal perception, but also how this might change.

Those involved in the underwriting process acknowledge the importance of risk changes and reputational risks. As a result, certain insurers are drawing up underwriting guidelines for their employees to ensure that they handle sustainability risks in a standardised manner aligned with the company’s strategy.

Within the Swiss insurance industry, a survey of SIA member companies revealed that most of them manage sustainability risks at senior management level as part of their sustainability agendas.

Some sustainability risks are explicitly defined and integrated into existing or additional risk frameworks. Where this is the case, responsibility for sustainability risks is embedded in the company’s departments and is a thread that runs through defined governance processes covering different divisions. At these companies, responsibility sits with the boards of directors, the highest level of seniority.

The insurance industry has different business models. A local insurer specialising in property and asset risks, for instance, will have a markedly different positioning to a global reinsurance company when it comes to climate risks.

International insurance companies were therefore quicker to integrate sustainability risks than those that mostly operate on a national scale or on a global scale but within a limited field. These different levels of integration mean that the reporting and systematic checking of defined underwriting processes in relation to sustainability risks can look very different.

International insurance companies with specific reporting are beginning to take a more holistic view of sustainability risks, including direct financial impacts.

As insurance companies strengthen their expertise in sustainability risks, they can encourage their business partners to change or abandon unsustainable practices and processes.

In contrast, the focus for private insurers that do not operate globally, or do so only in a limited way, and that have already integrated these risks into their business is more on minimising the reputational risks associated with sustainability risks. Besides withdrawing cover for certain business activities that entail high sustainability risks, sharing expertise to support the transition to a low-carbon economy also plays a key role in mitigating reputational risk.

Completely withdrawing from certain business areas remains a last resort that is rarely used. As insurance companies strengthen their expertise in sustainability risks, they can encourage their business partners to change or abandon unsustainable practices and processes.

Due consideration must be given to both the risks and the opportunities that this transition presents. For instance, the economic transformation will eliminate jobs in high-risk sectors like those that rely heavily on fossil fuels, while new ones will be created with the development of sustainable business models such as cleantech.

The underwriting and risk assessment process is complex, and the extra focus on sustainability compounds this: Additional aspects need to be factored in to ensure that the risk assessment is comprehensive and takes adequate account of the future. For instance, assumptions must be made about new climate-friendly technologies, and social considerations need to be examined, and the necessary data is not always immediately available. Insurance companies’ product management and underwriting departments need to determine how they will integrate sustainability criteria into their strategy and operations. Their responses vary depending on the business model and area, and the insurers develop them individually.

Putting sustainability criteria into practice is one of the biggest challenges currently facing the industry. Compared with the retail segment, which includes buildings and motor vehicle insurance, implementation is generally more straightforward in the corporate customer segment. Here, established guidelines on sensitive sectors and business practices ensure compliance with fundamental human and employment rights and provide guidance on how to approach climate change.

There is support from data providers, which offer sustainability criteria for classifying risks, and knowledge-sharing through international organisations such as the UNEP FI Principles for Sustainable Insurance Initiative (PSI Initiative). Swiss insurance companies have adopted parts of the PSI framework for managing environmental, social and governance risks in the non-life business, and it is increasingly being used in defining risks. This helps insurers to set their risk appetite in terms of industry segment and coverage.

The UNEP FI Principles for Sustainable Insurance (PSI) are a global framework for the insurance industry, endorsed by the UN General Secretary and the CEOs of major insurance companies.

It is a global collaborative initiative to bolster the insurance industry’s role as risk managers, insurers and investors in building resilient, inclusive and sustainable societies and economies on a healthy planet.

Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance and contribute to social, economic and environmental sustainability.

The PSI sees sustainable insurance as a strategic approach where all activities in the insurance value chain are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues (ESG).

Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance and contribute to social, economic and environmental sustainability.

The PSI published its very first ESG guide in June 2020, addressing the non-life insurance business. It contains examples of sustainable approaches in the insurance industry that cover a wide spectrum of ESG issues, including climate change, environmental degradation and pollution, animal welfare and testing, child labour, controversial weapons, and bribery and corruption.

The guide describes eight key areas where insurers can take actions to manage ESG risks in their insurance business, with a focus on underwriting and risk assessment.

These cover developing the company’s ESG approach, establishing its ESG risk appetite, integrating ESG issues into its organisation, establishing roles and responsibilities for ESG issues, escalating ESG risks to decision-makers, detecting and analysing ESG risks, decision-making on ESG risks and reporting on ESG risks.

It also seeks to raise awareness of the potential benefits of integrating ESG into the insurance business model, such as mitigating reputational risks, managing societal expectations, identifying the financial benefits of clients with strong ESG performance, and engaging and supporting clients and employees.

About the author:
Butch Bacani is Programme Leader of the UN Environment Programme’s Principles for Sustainable Insurance Initiative.