RISE WITH FIS

Seven reasons why insurers should tackle climate change in 2022

Martin Sarjeant | SVP, Product Management, Insurance, FIS

January 31, 2022

Insurance companies held $28 trillion in assets at the end of 2019. This represents a significant proportion of corporate bonds and equities globally, making insurers a hugely important group of institutional investors. As such, the sector has the power and the responsibility to divert more of its investments into ethical and sustainable assets and to raise awareness and effect change in the companies they are investing in.

Many insurers are already doing good work around climate change. But seven trends are going to drive even greater engagement in 2022 – and create significant benefits for these firms at the same time.

1 – You need to reduce your transition risk

Assets that rely on fossil fuels or are carbon heavy will likely have little to no value in the future as we transition to a low-carbon economy. The speed at which these investment values fall will depend on government policy, consumer and investor sentiment, and whether the companies themselves pivot to cleaner or renewable energy. So, investing in fossil fuels exposes insurers to very real transition risk, particularly for large life insurers. Other transition risks could exist in the business underwritten and your exposure to carbon-intensive sectors.

AIA and L&G are just two examples of insurers that are actively “decarbonizing” their portfolios. Whilst this will help shift their portfolios to more sustainable investments, it’s also plain good risk management of the transition risks.

Conclusion: you must have a measured strategy of managing your underwriting and investment portfolio to reduce and manage these risks.

2 – Your stakeholders want change

Employees, policyholders and shareholders are all demanding change, both on climate and across the whole Environmental, Social and Governance (ESG) spectrum. Of these groups, the most influential may be current shareholders, as they can very easily move their investments elsewhere. Many of these shareholders will also be looking at investing in companies with a strong commitment to social responsibility and climate change, and they’re looking for leaders – not laggards – in the sector.

Existing policyholders have a voice too, but it’s not so easy for them to simply move to another provider, particularly on the life insurance side. But new policyholders do have the freedom to choose where they place their business.

Lastly, existing employees should be asking themselves some questions: What type of company do I work for? What are the sustainability goals? Who is our Chief Sustainability Officer? Am I ok working in this company?

Equally, it’s likely that in the “war on talent,” candidates will be analyzing their prospective employer’s ESG credentials and including them alongside traditional criteria like salary and responsibilities when they decide whether to take a job.

Lastly, there’s also a consensus for change at the board level. Seems a pretty good reason to make changes.

3 – It will address your direct exposure to climate-related risks

The physical risks associated with climate change may be the most obvious way that you’re impacted by climate change. It’s also where you can directly benefit from tackling climate change.

In 2021, natural catastrophes caused an estimated $105bn insured losses globally. Temperature change is only going one way. Tackling climate change throughout the organization, from top to bottom in all aspects, will help you do your bit and lead by example. Everything that you, and the sector as a whole, do to limit climate change will likely help reduce the ultimate level of future claims’ frequency and severity.

4 – Regulators will enforce change

Yes, more regulatory change is coming – and from every direction. A few examples:

  • The International Accounting Standards Boards set up the International Sustainability Standards Board in November 2021. The objective is to provide investors with high quality, transparent, reliable and comparable metrics on climate and other ESG components.
  • In the UK, the Prudential Regulatory Authority, Bank of England, Financial Conduct Authority and Climate Financial Risk Forum are all looking at introducing new regulatory frameworks.
  • The Task Force for Climate-Related Financial Disclosures (TFCD), EIOPA, NAIC and regulatory bodies globally are looking at climate and sustainability reporting and integrating climate risks into the supervisory frameworks.

Initially, regulators may just “shine a light” on defining climate risks and levels of exposure. However, as time goes on, both regulators and insurers will likely become more sophisticated in the disclosure, quantification and management of the risks. Inherent risks that are off the balance sheet today will quickly come to the surface. So, make sure you review the upcoming regulations that are relevant to your business, and go beyond merely trying to tick the box of compliance.

5 – It will raise the profile of the insurance sector while lifting corporates too

The insurance sector hasn’t always had the best reputation. Over the last 30-odd years there have been various incidents of “bad press,” most recently perhaps some of the business interruption claims that went through the courts in relation to the COVID lockdowns. This got so much publicity that it overshadowed all the good work and support insurers gave to policyholders during COVID (and which they continue to provide).

Insurance companies were set up as a social good, pooling premiums and investing them to pay out to those unlucky enough to need to claim. The industry still delivers to the policyholder and beneficiaries in their time of need, and it really is a force for good. It should be rated as one of the top industries and have a stellar reputation. Yet it isn’t.

The challenge of climate change gives the industry a great opportunity to get back to being a social good, raise its profile and lead change. As an industry, the direct and indirect impact of making changes will cascade through all corporates that insurers have a relationship with. And it can have substantial second order impacts on climate change.

6 – It will help your top line

I’m not saying any insurer would only address climate change to increase their revenue. However, we know existing policyholders want this. And we know that when prospective policyholders compare insurance companies, they’re starting to look at more than price, historic returns, customer service and reputation for paying claims.

Your brand and association with sustainability will become an important differentiator – and it may already be the leading factor in some policyholders’ purchasing decisions. Just look at the growth in the number of consumers making ethical choices by buying organic produce or paying for carbon offset on flights.

7 – Social responsibility

It’s the right thing to do. Full stop.

Put it all together and you can’t argue – it’s time for insurers to step up to the plate. Will you join in?