The ESG Transformation of the Insurance Industry: How to NetZero Your Business
Board of Directors' Guide to the ESG Transition in the Insurance Industry by Yusuf Azizullah GBAC Boardroomeducation.com CEO
As the insurance industry enters a new digital transformation era, AI technology is crucial in driving innovation and improving business processes. AI-powered solutions such as chatbots and automated claims processing improve customer experience, help insurers streamline operations, and make more accurate risk assessments.
I will talk about some of the best practices that are happening with insurance underwriters and large-scale global companies, what they're doing and what lessons we can drive from them to apply in our day-to-day jobs for Environmental Social & Governance (ESG)
Economic Disruptions To The Insurance Industry - Affecting Premiums
The war in Ukraine, COVID recovery, the energy crisis in Europe, droughts, and skyrocketing food prices due to inflation are burdening customers from making their insurance policy’s premium payments and affecting insurance underwriters’ bottom lines. The purchasing power of consumers is going down and affecting households’ disposable incomes.
Many consumers have defaulted on their premium payments, many businesses have defaulted on their insurance business premium payments, and underwriters have to lapse those policies.
What CEOs are telling me About ESG NetZero Strategies
As the CEO of a global 100 company, he is under immense pressure to provide answers to his institutional investors about the company's ESG strategy. He has to explain how the company will make money while doing good by investing in green technologies. The pressure is mounting, and he is feeling the strain. This is a scary situation because he knows that his investors will pull out of their support if he cannot provide satisfactory answers. This could have devastating consequences for the company, stock prices, and attractiveness with institutional investors. The CEO is racing against the clock to find a way to save his business.
ESG Net-Zero Strategy Considerations
•Many companies are using Carbon Credits to meet their sustainability requirements and net-zero requirements
Carbon credits are being sold on stock exchanges as a way for companies to offset their emissions. Thailand, Japan, the UK, Australia, and many other exchanges are venturing into this solution.
• The London Stock Exchange recently launched easy listing guidance for companies that issue carbon credits.
• Carbon credit trading is a way for companies to balance their emissions levels by buying or selling credits from other companies.
• The goal is to get to "net zero" emissions, where businesses offset all the carbon they produce.
•Companies are starting to claim they will be 100% carbon-free by 2030 or 2050; many of these claims are false and global regulators are finning companies for false statements.
• This is called greenwashing, and it's a problem because it makes people think that companies are taking substantive steps to reduce their carbon footprint when they're not.
• The only real option for reducing emissions is Artificial Intelligence innovation and digital transformation of ESG systems, which I cover in detail in my online self-study ESG course, specifically in the area of underwriting.
A survey of 30 insurers found that 38% are already considering ESG factors when assessing risk and that all respondents believe these factors will become increasingly important in the future. Source Marsh.
All of the largest insurance carriers in the UK have confirmed that ESG factors in underwriting will be massive if they do not become a de facto standard.
• This means that it is part of your underwriting process, and you must consider it.
•AIG will no longer issue policies to customers or do business with them if they have 30% of their portfolio based on coal or any other carbon-emitting substance.
AXA Chairman of the Board and CEO on Sustainability
(summarized main points below from interview)
How did AXA’s climate journey begin? What pushed you into action?
Denis Duverne “We kicked off our climate journey with the world’s first large-scale divestment from coal in early 2015. This decision generated a heated debate in financial circles. Even internally, it is fair to say that it required much persuading. However, we concluded that this was the right thing to do….”
Thomas Buberl (TB)– “…climate change concerns both the asset and liability side of their business, so they restricted underwriting for coal-related companies. We decided to extend this approach to our insurance business by restricting underwriting for coal-related companies. Again, this was a pioneering move then, but it has become relatively mainstream today.”
Divesting, banning: is AXA all stick and no carrot?
TB – “No. Our first green investments target accompanied our initial decision – a divest invest strategy/carrot-stick strategy – which we have ramped up several times since. We now aim to achieve €25bn in green investments by 2023, starting from a baseline of €1bn in 2015. Our teams are also working on a “green business” strategy, and daily, our underwriting teams support clients that need to transition towards more sustainable business models. We are much more carrot than stick! And we also exert discernment when looking between green and brown because the transition is not a binary affair.”
Key Takeaway
The company began divesting from coal in early 2015.
They have a goal of €25bn in green investments by 2023.
Many green bonds are issued by industrial players that need capital to support their transition but bear a high carbon footprint today. While a coal plant may be an investment risk, it can be a profitable asset from a Property insurance perspective.
Green business does not always mean good business.
One complex question beyond our industry is how to combine scoring under the E, S, and G components or how to articulate climate change and biodiversity.
Companies that don't adapt their business to low-carbon models are not sensible investments.
AXA has several governance structures in place to manage insurance-related ESG risks. AXA has a team that monitors potential long-term environmental, social, and governance risks.
AXA has a robust governance framework to develop and implement its Sustainability Strategy, which includes climate, ESG, investment, and insurance underwriting dimensions.
Zurich’s Sustainability Strategy
•The Executive Committee and Board play an active role in Zurich's approach to sustainability.
• The Governance, Nominations, and Sustainability Committee (formerly the Governance and Nominations Committee) reviews and approves the Group's sustainability strategy.
• The Sustainability Leaders Council, set up by the Executive Committee, comprises senior executives from across business units and ensures that Zurich meets its sustainability objectives.
• Zurich is committed to transparency on sustainability-related matters, publishing an annual highlights report which includes their commitment to various UN programs and non-financial KPIs related to their sustainability strategy.
• Insurers have a responsibility to create a sustainable future beyond mere compliance with regulations; this is something that Zurich takes seriously through both its words and actions.
•Zurich is committed to reducing its environmental impact and has already taken measures, such as investing in renewable energy and increasing energy efficiency.
• The company has adopted new environmental targets to ensure continuous improvement in its performance.
GBAC ESG AI Recommendations
As the world comes to grips with the far-reaching implications of climate change, the insurance industry is under increasing pressure to reassess the risks associated with insuring specific types of property and businesses. Insurers are responding to this challenge by offering Environmental, Social, and Governance (ESG) underwriting services. These services help insurers to identify and assess the risks posed by companies that are not adequately managing their environmental impact or social responsibilities.
In addition, GBAC AI board advisory services can help insurers better understand how climate change will affect their business and make informed decisions about risk insuring and how much coverage to provide. As the insurance industry adapts to a changing world, ESG underwriting and AI board advisory services will play an increasingly important role in helping insurers protect their customers and businesses.
Reach me for collaboration on ESG boardroom advisory services Yusuf Azizullah ya@globalboardadvisors.com USA 1) 571-277-0642