Integrating ESG in Reinsurance

In an era where sustainability and ethical governance are becoming paramount, the reinsurance industry stands at a critical juncture—one in which environmental, social and governance (ESG) approaches have not only become a regulatory expectation but also business imperatives. Integrating ESG plans into the reinsurance sector, it appears, is vital for identifying and mitigating evolving and expanding risks.

ESG factors, such as climate issues, workforce concerns, human rights, anti-corruption measures, carbon emissions and business ethics, increasingly are being assessed within risk management frameworks. This approach allows companies to better monitor and address these factors effectively.

The insurance industry’s potential exposure to ESG risks on both underwriting and investment fronts necessitates a forward-looking stance. There is a growing expectation from investors, regulators, customers and employees for reinsurers to prioritize ESG considerations in their decision-making processes, thereby enhancing social responsibility and operational resilience.

I believe staying abreast of ESG developments is crucial for sustainable growth. By embedding ESG factors into risk assessment and underwriting processes, the industry could better monitor and address the increasing range of climate-related risks. Furthermore, the integration of ESG principles, driven by legislative and regulatory action, could be utilized to meet investor expectations and help ensure the industry’s resilience in a rapidly changing world.

I interviewed Harry Lee and Fiona Tang, FSA, who are deeply involved in integrating ESG principles within the reinsurance industry. Their perspectives shed light on the importance of proactive ESG awareness and provide thought leadership for driving sustainable and inclusive growth.

In general, what are the ESG concerns for different industry segments?

Tang: Standing for “environmental, social and governance,” ESG comprises concerns about how a business is run and sustained. It can be considered as a risk management framework for evaluating risks and opportunities beyond the conventional financial ones. This calls for a broadened lens or metrics to look into factors like climate issues, workforce concerns, human rights and anti-corruption, potentially embracing, for example, a company’s own carbon emissions, investment policy, governance structure, business ethics, organizational diversity and so on.

To illustrate, the EU Regulation on Sustainability—Related Disclosures in the Financial Services Sector asserts that “sustainable investment” holistically includes all three ESG pillars. On the other hand, the number and type of ESG risks or concerns are growing (for examples, see “AM Best’s Special Report”).

What do you think motivates the reinsurance industry to undertake earlier recognition and proactive management of ESG risks?

Lee: Both on the underwriting and investment fronts, our industry (reinsurance) potentially can be exposed to ESG risks. On the other hand, investors, regulators, customers and employees are growing in their normative expectations of reinsurers to put ESG considerations at the forefront of decision-making. We are expected to become more socially responsible and our operations more diverse. In certain jurisdictions or regimes, like Europe, ESG components have become mandatory rather than voluntary.

Staying on top of ESG considerations and evolvements is crucial for our growth sustainability. Here are some concrete examples:

• Proactively embedding ESG factors into our risk assessment and underwriting processes can control our losses from the growing number and range of ESG risks like climate change.
• AM Best’s research “Investor Pressure Adds Momentum for Reinsurers to Integrate ESG Factors” indicates investor pressure is emerging as a significant driver of ESG considerations and actions due to heightening legislative and regulatory scrutiny.
• In terms of the social element, advancing diversity, equity and inclusion (DEI) fosters a diversity of thoughts and capabilities in the workforce, supporting sound consumer outcomes and sustainability objectives.

Well-developed and executed ESG strategies can meaningfully impact not only our own organizations but also our communities and even the real economy along our value and supply chains.

What has the reinsurance industry done in regard to ESG?

Tang: Our industry’s core strength is evaluating and advising on a wide range of risks we underwrite related to different industry segments, professions or individuals. In certain areas, notably climate, our industry can play a leading role in helping other industries understand and act on ESG pillars.

Many players also have made commitments regarding their own operations—e.g., plans to be a net-zero emissions company within a targeted timeline—and have developed science-based targets for underwriting. In addition, corporate DEI commitments and frameworks have been adopted to foster a diverse and inclusive workplace and culture, to support effective talent retention and growth.

Also along the value chain are visible efforts of the industry to capitalize on ESG opportunities through product and service innovations. These include:

• Insuring technologies and infrastructure projects of climate change mitigation and adaptation; e.g., coverage for renewable solar, wind or hydraulic energy projects
• Premium discounts for hybrid or electric passenger vehicles in lieu of traditional vehicles
• Insurance solutions based on indices (parametric insurance), enabling faster payouts to support recovery and build resilience

Lastly, major global reinsurers are proactively and wholesomely engaging with a wide range of stakeholders (e.g., clients, government entities, investors, rating agencies, employees, NGOs and others) related to building risk knowledge, creating risk awareness, jointly stimulating innovation, nurturing collaboration, co-creating solutions and services, and sharing best practices.

What challenges are there to overcome from underwriting, coverage and reserving aspects?

Lee: Undoubtedly, the most immediate and biggest challenge in underwriting comes from the physical and transition risks of climate change and other environmental hazards, such as natural catastrophes and environmental litigations.

ESG-related risks and the legal and technological landscapes continue to evolve. They may manifest as multipliers of existing exposures or new sources of exposure.

On the other hand, awareness of ESG-related risks, including climate change, cybersecurity and social unrest, is trending up, and so is the demand for coverage solutions. Innovative products and service offerings that match expectations and incentivize ESG-friendly practices and transitions are gaining traction.

It becomes more imperative to integrate ESG factors into underwriting, reserving and risk management. To this end, building multifaceted new knowledge and expertise across the relevant cross-functional teams within the (re)insurer is crucial. Scarce and isolated data concerning those emerging ESG risks will need to be strengthened. Investment into external stakeholders’ engagement and exchange will generate insights as well as sharpen best practices.

What skills and training do actuaries need in order to play a significant role in this area?

Tang: As an actuary, having a solid understanding of ESG is becoming increasingly important. Actuaries need to understand how environmental (e.g., climate change), social and governance issues can affect the company’s risk profile or even its financial performance. Identifying and quantifying the ESG-related risks and opportunities is crucial for risk management and valuation, for example, to develop climate risk scenarios to fulfil the evolving ESG regulatory and reporting requirements and adjust the actuarial models and assumptions to account for ESG-related risks in the projections. In addition, actuaries can contribute their expertise in pricing and product design to support the growth in demand for sustainable and responsible financial products.

A comprehensive understanding of ESG allows actuaries to help their organizations navigate the evolving ESG landscape and manage risks. Actuaries should engage with other ESG stakeholders and undergo continuous professional development in ESG-related topics to stay relevant and understand the latest trends, best practices and regulatory developments.

Lee: From an underwriting and cross-functional perspective, the risk landscapes and environments surrounding us are constantly evolving. Experts and practitioners must work together to grow and sharpen their knowledge.

I want to highlight that equally important is the skill and capability to convert knowledge into insights and solutions, as well as the ability to concretely explain what it means to stakeholders around us. That’s technical leadership!

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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