There is a considerable overlap in the environmental, social and governance (ESG) issues currently challenging the insurance industry. As well as these risks being connected, so too are the solutions.
There is no denying ESG is an industry buzzword at the moment. In itself, it is a great tool to bring together a broad spectrum of ideas in one place, rather than in silos. Like a venn diagram, it can be seen as three interlocking circles, with a key sweet spot in the middle identifying issues that affect all three areas. By identifying these key areas, it is possible to identify thematic solutions.
Climate change
One such topic is climate change. Around the world, governments, insurers and regulators are talking about how to respond to the wide-ranging threats climate change and global warming pose. It has been a meteoric rise that has seen climate change top strategic agendas and scenario planning, fuelled by reports such as the Climate Change Committee’s Independent Assessment of UK Climate Risk in June 2021.
As risk carriers, insurers face enormous pressures to withdraw from underwriting fossil fuel risks while developing fresh capacity for renewables. As major institutional investors, insurers find themselves identified as key players in the growing focus on sustainable finance, a key topic for COP26 in Glasgow in November.
The interconnectivity of risks here is clear to see, with climate change closely linked to flooding. Even then, it is not just the environmental consequences but the social impacts that need to be taken into account. Flood Re has advised that the largest group of people affected by flooding in poorer areas are tenants without contents insurance and alternative accommodation. This is therefore a protection gap issue as well.
Insurers are however responding well. For example, the Zurich Flood Resilience Alliance connects people and organisations to build better understanding of how the risks facing the wider community interrelate. The aim is not only to educate these individuals on how they can better protect themselves from the consequences of natural hazards but also to help them find alternative sources of income. The Z Zurich Foundation has a wide range of projects running and DAC Beachcroft is proud to be supporting two key initiatives: one is in Chile, advocating for better flood resilience planning; while another in Europe is assisting with the development of innovative tools to share and use data better to understand flood risk.
While these projects look forward, climate change litigation also requires us to look back at the consequences of earlier generations of pollution and carbon emissions which are now hitting the courts across the world. The debate about the impact of pollution on individuals took a new turn when air pollution was recognised as a cause of a person's death in the UK in December 2020. Southwark Coroner's Court in London found that it made a material contribution to the death of nine-year-old Ella Adoo-Kissi-Debrah. She had lived near the South Circular Road in Lewisham and died in 2013 following an asthma attack. It was cited by Birmingham City Council as one of the reasons for introducing tough controls on city centre traffic in the summer of 2021.
And so governance and regulation are connected. A leading campaign group, California-based Insure Our Future, is also lobbying regulators to be even tougher in the pressure they are putting on insurers to be more rigorous in assessing their contribution to global warming, as the new round of stress-testing of climate impacts gathers momentum. Regulators are listening to these demands as they know they are accountable to politicians who want big wins on climate change.
Social inflation
This increasing pressure on the management of large companies to act in line with public sentiment and the expectations of their investors is one of the many drivers of social inflation. Although it is a US phenomenon, referring to the rise in the cost of insurance because of increased litigation and higher value judgments, it is becoming a major concern in Europe as well.
The use of a jury in civil cases in the US is a critical factor in explaining the increased frequency of large awards against corporate policyholders and their insurers in liability cases. This has led to a rise in so-called nuclear verdicts (judgments in civil cases over US$10m).
In Europe, a new trend in social inflation is beginning to emerge, where climate activist groups are using the courts to compel companies to comply more definitively with existing law and regulation around reducing emissions. The first example is a collective action initiated against Royal Dutch Shell by climate groups and 17,000 civilians in the Dutch courts. The court agreed that Shell was not doing enough to mitigate its impact on the climate and ordered Shell to reduce global CO2 emissions by 45% by 2030. More recently, German climate activists have issued a claim against BMW and Daimler on almost identical grounds.
While Shell is not faced with the immediate financial impact of a penal monetary award, the longer term consequences of achieving those more stringent emissions targets will be significant, both in terms of increased transition risk and managing its ESG disclosure obligations. This climate activist litigation will have wider implications for all large carbon producing entities, who may choose to adjust their own emissions targets for fear of being targeted directly by activists.
Cyber risks and data privacy
A third area where ESG issues overlap is cyber risks and data privacy. In the past 18 months, as physical movement has been severely curtailed by the global pandemic and pushed more of our lives online, a lack of privacy and the potential for security breaches has become an even greater concern, heightened by requests for individuals to share personal health and location data with third parties.
Fortunately, regulators and policymakers around the world have not been idle in getting to grips with the issue. If anything, COVID-19 has emphasised the need to place privacy much higher up the regulatory agenda. Greater privacy protections can again be seen in a growing number of class actions around the world. Again, these claims attract media attention which leads to social inflation and a greater risk of claims.
The interconnectivity of solutions
Having identified connections across the risks, is it possible to identify themes across the solutions? Our thought leaders at DAC Beachcroft recently charted global risks against possible categories of intervention. While not definitive, it allows the industry to identify where to focus its efforts most effectively in the search for operational and financial resilience.
Solutions include public/private insurance partnerships; government policy intervention; government investment; green finance; regulatory action and international co-operation.
Certainly, one crucial solution lies in creating a trialogue between government, regulator and industry. Just as the ESG issues overlap, so too is there a sweet spot where government, regulator and industry meet. Together, there is the ability to create strong public-private partnerships, bridge protection gaps and lend the industry’s skills to building a more resilient world. Together, collaborative solutions can be found to a broad range of issues, including transformative public concerns such as social cohesion, consumer vulnerability and diversity.
One important ambition for our business is to seize the opportunity to improve diversity in the workforce. We can all be more agnostic about location and that will have an impact on talent as it becomes more mobile. By showcasing and modelling our cultural values, we can attract and retain talent. ESG may be a trendy buzzword, but it encapsulates a very real opportunity. We are working hard to break out of traditional silos and focus across the business on thematic initiatives that display the breadth of our expertise. We all now need to work together to look at our environmental footprint, internal structures and policies, reporting, workforce supply chains, investment, new products and community work to create a resilient industry of which we can all be proud.
Our recent thought leadership is supported by deeper dive articles on climate change, social unrest, Brexit and Privacy. For more information please visit Informed Insurance.
This article was first published in Insurance Day, written by Helen Faulkner, Head of Insurance and the ESG in Insurance Working Group at DAC Beachcroft and Charlotte Shakespeare, Senior Insurance PSL.
