The effects of climate change are visible every day on social media feeds and in the news, but despite a string of devastating disasters this year in the US, continental Europe and India, too many still believe it won’t happen where they live. The reality is that climate change is making many areas of the world increasingly vulnerable.
The insurance industry’s purpose is to help protect people, and society expects insurers to play a leading role in environmental, sustainability and governance (ESG) initiatives and to do their part to create a low-carbon world.
Some insurers are already rising to the occasion by putting ESG and climate change at the center of their strategies. As the number of climate change-fueled disasters worldwide increases, insurers can make a positive impact and influence policyholders, government agencies and society by developing education and risk strategies.
Helping Governments Better Understand Risk
As governments struggle to cope with the effects of climate change, they may start reaching out to insurers to help them. Earlier this year in France, a devastating frost led to the country’s smallest harvest in 40 years. As a result, President Emmanuel Macron is implementing a new mechanism to ensure farmers can access affordable insurance coverage. He’s asked the private sector for help and has committed the government to participate too.
Governments struggling to cope with the effects of climate change may start reaching out to insurers to help them better manage risk.
Public-private partnerships like this will help reduce the protection gap, enable insurers to influence national policy and reduce the financial impact of climate change. Government-backed flood insurance schemes, for example, have already been effective in countries such as the UK, France, and Belgium.
The danger of governments not properly understanding climate change’s impact is that insurers may be forced to offer coverage outside of their underwriting and pricing standards. In 2020, California lawmakers enacted a price freeze on homeowners’ insurance policy renewals after devastating wildfires, forcing insurers to renew policies at the same price despite the higher risk. Insurers must play a role in helping the state find more sustainable solutions to protect residents from the ever-increasing risk of wildfires.
Building a Competitive Advantage Through ESG
Insurers can leverage ESG initiatives to gain a competitive advantage in four ways:
1. Build educational risk control platforms to educate policyholders and prospects.
Some insurers are already marketing new “risk control” or “loss control” services to personal lines, and small and mid-sized businesses to help them better understand and reduce risk, and to help them insure against risks that cannot totally be removed.
These have the potential to change the way policyholders perceive insurers, making them a consultative partner that advise businesses about the climate-related risks they face. It’s a service-oriented approach that would almost be as revolutionary as a bank that helps you answer the question, “What can I do with all my money?”
2. Capitalize on reporting on ESG initiatives.
In many European countries, companies must report on their ESG initiatives, while in others , such as Switzerland, it is voluntary. Insurers should view this type of reporting as a differentiator, not a constraint.
Companies that implement and regularly communicate about the success of their ESG initiatives will develop a more positive brand image. Those that greenwash — claiming to be environmentally friendly while not implementing best practices authentically — will falter, because today’s consumers and potential employees won’t support companies that aren’t 100% committed to and transparent about ESG.
3. Connect to employees through ESG initiatives.
People — especially from younger generations — increasingly seek out companies that prioritize ESG when deciding where to work. According to a 2020 EY report, 60% of millennials surveyed say they’d be willing to accept a smaller salary to work for an environmentally responsible company, illustrating that ESG initiatives can now be useful tool in successfully recruiting and retaining staff.
EY teams are constantly seeking ways to engage the company’s 330,000+ employees worldwide in the bold goal to become carbon-zero by end of 2025. That includes a commitment to reduce employee travel by 35%, and to help it has developed a tracker that monitors the environmental impact of each EY employee’s business travel. It’s used in 90 markets worldwide and focuses on three stages:
Trip planning: estimating how much carbon will be emitted during the trip and suggesting potential alternate routes
Booking: providing an overview of the expected carbon emissions
Post-trip: providing an actual amount of carbon emission generated
It also uses business intelligence software to create personal dashboards for each employee, showing them how much they traveled over the past 12 months, which mode of transportation they selected and how far in advance they booked their travel, as well as giving them tips to improve their score in future. This type of ESG reporting helps give employees concrete steps to reduce their carbon footprint.
4. Develop products that incentivize people to make green choices.
This is perhaps the most challenging, yet most impactful way insurers can develop a competitive advantage. Insurers can only develop ESG incentives if they create a legitimate reduction of risk, otherwise they could erode their profitability.
Yet, opportunities do exist. The industry could adopt what some insurers already do, which is to incentivize people to protect their properties against flood, by giving policyholders reduced premiums for using specific building materials. Another example is pay-as-you-drive car insurance that benefits the insurer (as the fewer miles a customer drives the lower the risk of an accident) as well as the planet, by reducing the policyholder’s personal carbon footprint.
Where Can Insurers Learn More about ESG?
As the industry turns its focus to stronger ESG commitments, I encourage insurers to use industry-focused resources to define standardized reporting or KPIs on their environmental performance.
I encourage insurers to use industry-focused resources to define standardized reporting or KPIs on their environmental performance.
I recently spoke at the Insurance Industry Charitable Foundation (IICF) Inclusion in Insurance Forum with my colleague, Ed Majkowski, on how insurers can address ESG-related risks and opportunities. Industry events like this provide a platform where insurers can learn from each other, understand more about how to communicate their ESG commitments and understand what’s lies ahead for the industry.
Tackling climate change is a massive undertaking, but it’s not insurmountable. While insurers must take a leading role, by committing to ESG and creating green products and services, everyone has a role to play. The more insurers educate their clients, governments, and regulators to better understand the climate risk, the more chance we have of moving more quickly to a low-carbon world.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
