Study reveals benefits of operationalising ESG in risk transfer & ILS

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Market participants across risk transfer, including insurance-linked securities (ILS) and reinsurance, have a lot to gain from further operationalising Environmental, Social and Governance (ESG) within their core businesses, our now published study reveals.

esg-risk-transfer-ils-market-studyDuring the third-quarter of 2020 we teamed up with boutique consulting firm Synpulse Management Consulting to conduct a survey of the maturity of environmental, social, and governance (ESG) practices in the risk transfer, reinsurance and insurance-linked securities (ILS) markets.

This is the first environmental, social, and governance (ESG) survey of its kind, analysing how companies in the risk transfer market have incorporated ESG factors into their strategies and operations.

The full study of the survey responses is now available for you to download here and while it highlights significant room for improvement, in how the industry has embraced and embedded ESG within its operations, it also makes clear the benefits market participants can reap from further operationalising ESG.

Our study partners Synpulse explained, “Many market participants are no longer just incorporating ESG into their investment considerations, but into their overall business operations. Key drivers for this development are investor demand, reputation and risk management. The market agrees that ESG is an important topic. However, the integration of ESG is still in the early stages.”

However, the study reveals that market participants have a lot to gain from making ESG a core part of their business models and this, alongside the demand on the investor side, is almost guaranteed to make ESG an increasing priority across insurance, reinsurance and insurance-linked securities (ILS) management.

Artemis and Synpulse surveyed companies from across the risk transfer market to understand the extent to which insurers, reinsurers, dedicated and non-dedicated ILS fund managers, as well as institutional investors, incorporate ESG into their strategies and operations.

The survey was structured to follow a dedicated ESG framework built by Synpulse, based on their ESG specific project experience and market research.

The goal was to help companies better understand what incorporating ESG within their business models would mean for them, as well as to provide important benchmarking information to help them understand how their own ESG maturity compared with others.

Patrick Roder, Associate Partner and Global Head of ILS at Synpulse commented, “For market participants in the risk transfer market there are great opportunities in investing in the topic of ESG. Given the growing importance of ESG, driven by investor interest and risk management considerations, it is promising for market players to scale up their ESG activities in 2021 and beyond. An individual assessment is needed to precisely define the focus for development, but despite these differences, we believe that an overall ESG framework can serve as a guide to enable companies to understand ESG holistically – from strategy definition to operationalization.”

The survey analysed a range of factors, including: strategy; culture & principles; processes & operations; services & products; as well as training & communication.

Overall, the results make clear: the perception of ESG importance; the state of ESG readiness across the industry; the challenges faced in improving ESG offerings; as well as the opportunity and benefits available to those who fully embrace and embed ESG within their operations.

The full study of the survey responses can now be downloaded here and some key findings are detailed below.

Strategy, culture & prinicles:
The actions taken by companies in terms of implementing an integrated ESG strategy do not currently match the perceived importance of ESG.
Survey respondents emphatically indicate that ESG is a major topic in the risk transfer market and is expected to become a critical success factor in the future. Investor demand, reputation, and risk management are key drivers of ESG. The reality today, however, is that ESG is still in early stages of application, as respondents indicated that most implemented ESG strategies are considered ineffective. Key areas of improvement include: Implementing a framework more thoroughly and sustainably, defining tangible ESG key performance indicators (KPIs) and measurable ESG goals as well as enabling target oriented external and internal ESG reporting.

Processes & operations:
There is interest in embedding ESG into operating models across the risk transfer market. There is still work to be done, until ESG is seamlessly and efficiently incorporated in companies’ business operations and processes.
In terms of operations, dedicated ESG roles are not yet commonplace in all companies in the risk transfer market. Among the surveyed peer groups, non-dedicated ILS fund managers and insurers appear best organized from a resource perspective.

Measurable ESG goals are currently either not defined clearly enough, or the goals themselves are considered unsatisfactory. When it comes to assessing a company’s ESG footprint, companies in NA have not yet embraced its relevance as fully as their peers in EMEA and APAC.

Participants primarily focus on covered risks and sponsors/cedents2 when analyzing external parties or elements of the risk transfer value chain for ESG adherence. Tools used for these assessments have been widely adopted in the market. However, the majority of respondents say that improvement is needed. The two key challenges identified by respondents are lack of data and disclosure as well as lack of consistency and standards.

Services & products:
Most survey participants state that they offer ESG-friendly insurance services & products. However, only a small fraction of fund managers offers ESG-friendly investment products.
Integrating ESG into underwriting standards and guidelines helps steer ESG compliance during the underwriting process, a practice adopted by most survey participants. Most insurance products currently offered in the market by survey participants target the social aspect of ESG, placing less emphasis on environmental and governance factors.

In contrast, most surveyed fund managers do not offer specific ESG-friendly investment products , although the
majority consider integrating ESG into their investment product offering to be important.

Most survey respondents follow a sustainable investment approach, with “exclusion” (e.g., excluding sectors and/or products based on ESG criteria) being the most commonly adopted.

Training & communication:
There is a disconnect between the perceived importance of ESG training and the degree to which it is offered. Insurers are the only peer group that reports extensively on any ESG KPIs.
Almost all survey respondents see training as integral to creating awareness of ESG topics, but almost half do not offer any training at present. ESG trainings held currently cover a wide range of topics, generally including elements from all three aspects of ESG, such as diversity & inclusion, respectful workplace, climate change and governance.

The majority of respondents communicate their ESG strategy and/or targets externally as well as internally, which shows that many could still gain more trust with their customers by increasing transparency.

Only a minority of participants report on ESG KPIs. Carbon footprint, volunteer work, diversity & inclusion, and governance & policy adherence are presently considered the most impactful ESG KPIs.

Download a copy of the full ESG in the Risk Transfer Market report here.

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