ESG having increasing impact on claims as risk managers seek bigger role

Insurers have been told that firms which have a more sophisticated approach to the issues around Environmental Social Governance (ESG) are increasingly becoming a better risk.

According to a new joint study today by international insurance broker, Howden, and specialty insurance and (re)insurance business Fidelis has found higher ESG ratings lead to better underwriting performance.

The research came in the day broker WTW issued the results of its study into ESG trends which found 77% of risk managers say they believed they had a bigger role to play in their companies’ ESG strategy and delivery.

The Howden/Fidelis study of loss ratios across 30,000 policies from the two companies’ datasets comprising a premium value of around $9 billion, against third party ESG ratings, is the largest study that has been conducted to date to establish the link between these factors.

David Howden, CEO, Howden Group Holdings says: “It’s great to see the proactive approach that Fidelis and other insurers are taking to better understand the link between ESG profiles and risk.  The data backs up our long-held belief that clients should be rewarded for high ESG credentials.

“This is an obvious way in which the insurance industry can support the transition. I hope to see, in the near future, ESG factors built in to underwriting processes and pricing decisions to a much greater degree.”

The study found companies’ Environmental ratings have the strongest correlation with loss ratios. However, there is variation by line of business and industry. Of the multiple lines of business studied, property insurance shows the strongest correlation between better ESG scores and better loss experience.

“The study reflects Howden and Fidelis’ mutual desire to support the transition to a more sustainable future,” the broker said in a statement.  “Howden and Fidelis are working to further examine the findings with a particular focus on exploring underlying causation, in order to enhance understanding and usability.”

Richard Brindle, Chairman & Group Chief Executive Officer and Chief Underwriting Officer of Fidelis says: “This is a great example of the right thing to do also being the most profitable thing to do. Being able to articulate this link will become increasingly important to our interactions with key stakeholders, not least the investment community.”

WTW’s study found more than half of risk managers are significantly involved in their organisation’s ESG efforts, but 77% believe they should take an active or more active role in ESG strategy and initiatives.

The broker surveyed 312 corporate risk managers world-wide. One third said ESG currently influences risk management strategy, and an additional 9% said it is set to do so during the next two years. However, only 35% of North American risk managers – and fewer in other regions – expect to have documented ESG risk management targets and milestones within two years.

Nonetheless, ESG is high on corporate agendas, with 74% of respondents stating that an improved ESG score is a core focus for their business. Regional differences are large, with ESG priorities highest in the Asia Pacific region, with the survey indicating this is lower among North American companies. Overall, 24% of US companies have set ESG risk management targets with clear milestones.

Most respondents believe that management of environmental liability risks influences ESG standing, and three quarters have taken actions to address environmental liability and climate risks (four fifths in APAC). However, many have done so without adopting specific goals or key performance indicators.

Lisa Lipuma, director of enterprise risk consulting, North America, WTW, said: “Many organisations equate ESG risk with reputational risk, but to manage ESG effectively it must be broken down into measured, manageable risks, and a risk management process established around them. Companies should first take a ground-up look at what ESG is, then identify the specific risks they face through a risk-mapping exercise. Finally, they should assess the impact, likelihood, and velocity of each risk before bringing them into the enterprise risk management framework. Our ESG analytical capabilities can help our clients understand their ESG exposure and help with ESG risk mitigation strategies.”

“It’s great to see the proactive approach that Fidelis and other insurers are taking to better understand the link between ESG profiles and risk.  The data backs up our long-held belief that clients should be rewarded for high ESG credentials.”

David Howden, Howden Group Holdings