ArticleESG Insurance Opinion

How can insurtech be used to measure ESG and assess risk?

Jack Sparks
Jack Sparks20-Oct-2021

Environmental, Social & Governance (ESG) is a huge topic in the risk, insurance, and re-insurance sectors across the globe.

How can insurtech be used to measure ESG and assess risk?

The Covid-19 pandemic has only demonstrated why ESG issues are so important, and a recent survey by BlackRock showed that 78% of insurers believe COVID-19 has accelerated their focus on ESG

Modern customers are discerning, not just wanting to make sure that they partner with insurers who offer fairly priced premiums and high-value services, but also caring about the ethical and social backgrounds of the companies they give their money to.

Paying close attention to ESG issues, which include health and safety, climate change, and sustainability, can play an important role in positioning your brokerage for a profitable future in the long term.

What is ESG and why does it matter?

ESG refers to Environmental, Social & Governance, or in other words the standards by which companies are held in relation to these issues. ESG is an important metric on which companies are valued and judged, not just in relation to their worth in the eyes of consumers but also around the various risks that a company might face in the coming years.

ESG is a relatively new concept, but it's here to stay. ESG is an important consideration when investors are valuing a company's worth, and likewise, it should be an important consideration when insurers are assessing risk and pricing premiums.

What goes into an ESG score?

ESG analysis is conducted somewhat differently depending on who you ask; broadly speaking, each provider will ask a company for detailed information relating to ESG issues and scores that company based on risk relative to similar companies operating in the same field. Whether you consult S&P ESG scores, Moody's, or MSCI, this is what you're getting.

The exact weighting that different teams of analysts place on different issues is the primary reason why ESG scores will differ somewhat between analysts. For some, climate and environmental issues may be favoured, while for others social factors will take centre stage.

However different metrics are weighted, though, the key thing to remember about ESG scores is that the more data that goes into compiling them, the more accurate they are likely to be. ESG scoring is essentially only possible because of big data, or large volumes of data that can be compiled and studied in order to identify patterns and predict trends.

For example, S&P ESG scores consult over 1,000 data points drawn from 100 questions and compare these against 5 years of data in order to accurately predict risk and value. Using these data points, ESG ratings can help insurers, investors, and other analysts to pick up on significant risks - for example, the risk of costly lawsuits in the future - that might otherwise be missed by more traditional analysis.

How can insurtech help us assess ESG?

Insurtech is a portmanteau that combines 'insurance' and 'technology', and essentially it encompasses all of the global innovations that are advancing the insurance industry. Insurtech relies on a number of key technologies, including artificial intelligence (AI) and machine learning, in order to automate, streamline, and improve business operations for brokers and underwriters.

Insurtech has, for a long time now, enabled insurers to make use of the large amounts of data they gather from customers, much of which is stored and untouched. With the help of machine learning software, insurance providers can scan big data for patterns that can be used to track ESG data for clients and applicants in order to assess risk.

Recent insurtech innovations include software that can organise and extract meaningful insights from large amounts of data.

Insights into a company's ESG rating that can be extracted from insurance data could include:

  • What is a company's track record of employee health and safety, including accidents at work and resulting lawsuits?

  • Where does a company source its materials from and where does it dispose of waste, and might these sources change in the future?

  • How might a company's assets be affected by the environment, most notably climate change and rising water levels?

  • Has a company taken sufficient steps to protect itself from potential cyber security risks by meeting regional standards for IT security?

These are just a few examples of ways in which ESG data can be used by insurers to assess both long-term and short-term risks. This report by Debevoise & Plimpton does a great job of explaining more about which aspects of ESG data are most concerning for insurers.

What's important is that insurers understand how to employ a wealth of AI tools in order to correctly utilise data for ESG analysis. In many cases, this might mean expanding customer surveys to include data points relating to ESG issues that have never been considered before, as well as programming AI software to identify patterns in this data that can be used to predict some of the long term dangers associated with environment, society, and governance.

Why ESG ratings matter to insurers

It's important that underwriters understand exactly why an accurate ESG rating is important for the future of insurance. Research by Allianz has recently made clear exactly how ESG can be incorporated into risk analysis, finding links between companies with higher ESG ratings and companies less likely to suffer workplace accidents and fines.

Further insight can be gained by looking at the individual elements of ESG scores; for example, one vector of the 'Social' segment of the ESG score is Workplace Health & Safety, and it might surprise some insurers to know that Allianz's research found that this was a superior indicator of future workplace fatalities than even the company's own historical accident rate.

Insurers can use the specific information gained from ESG analysis in their underwriting work, including when pricing premiums, triaging submissions and assessing which customers carry the most risk.

Brokers should also consider their own ESG rating carefully when devising marketing strategies, particularly when targeting younger customers including Millennials and Gen Z. Millennials in particular make up a growing percentage of any contemporary insurer's clientele, and they care more than any previous generation about the ESG credentials of the companies they work with.

ESG is no doubt set to become synonymous with many of the biggest ethical issues facing our industry over the coming years. Taking advantage of insurtech, proactive insurers should pay close attention to ESG issues today in order to pre-empt the problems we might face tomorrow.

If you'd like to know how Artificial could help incorporate ESG data into your insurance products, get in touch.

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