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October 13, 2021updated 06 Apr 2022 6:49am

ESG in Insurance: Macroeconomic Trends

By GlobalData Thematic Research

Listed below are the key macroeconomic trends impacting the ESG theme in the insurance industry, as identified by GlobalData.

Insurers need to adapt their products and services to provide affordable insurance to customers amid the risks presented by emerging health and demographic trends. Insurers should engage with investees to help mitigate risk and promote sustainable business practices.

Covid-19

Covid-19 will likely be a positive catalyst for ESG progress. The pandemic has brought to light important social considerations and demonstrated that sustainable companies are more resilient to external risks. The S&P 500 ESG index outperformed the traditional S&P index by 0.6% in the first four months of 2020, during the early stages of the pandemic. Fidelity International found that stocks with higher ESG ratings outperformed those with weaker ESG credentials during the first nine months of 2020, in an investigation of more than 2,600 companies covered by its equity analysts.

The pandemic will have a marked impact on the ‘S’ in ESG. According to a survey on signatories of the UN Principles for Responsible Investment (UN PRI), several of which are insurance companies, 64% of respondents stated that Covid-19 had brought social issues that were not already a priority onto their radar. These issues included occupational health and safety, social safety nets, diversity, and digital rights. Post-pandemic, respondents stated they would prioritise human rights, mental health, and access to healthcare. Covid-19 has had a disproportionate impact on women, ethnic minorities, and lower-income households, thus worsening social inequalities. Insurers will need to tackle this gap and promote better financial inclusion as part of both Covid recovery and ESG strategies.

Emerging economies

New consumer groups in these emerging markets will be looking for insurance coverage as less developed countries grow and play a more significant role in the global economy. Incumbent insurers are presented with an opportunity to expand their geographical scope and enter into emerging economies.

The new consumer groups will have different purchasing habits and insurance needs. Existing products and services will need to be adapted to account for different customer behaviour. Broader financial inclusion is an important social sustainability consideration. Consumers in developing markets tend to be mobile-first, using mobile devices as the primary point of interaction with service providers. More generally, technology has typically made insurance cheaper and more personalised. Capitalising on these trends will help insurers develop innovative distribution channels and insurance products tailored to specific consumer demographics.

Low-carbon transition

Many countries are attempting to move towards a low-carbon economy, in an effort to curb global warming and the impact of greenhouse gas (GHG) emissions on the environment. Governments are increasingly subsidising clean energy projects, resulting in a fast-growing renewable energy market. The UK, for example, plans to double the amount of renewable energy it will subsidise in 2021 in addition to allowing onshore wind and solar power projects for the first time since 2015. The delivery of renewable energy projects grew 45% between 2019 and 2020, according to the International Energy Agency (IEA). China, Europe, and the US lead the way. Countries are also focused on lowering transport-related emissions, with a particular push towards electric vehicles (EVs) and shared mobility systems. Consumer uptake of EVs will increase, as EV production ramps up and battery technology advances.

The low-carbon transition will heavily influence insurers’ ESG strategies. Companies will be expected to invest in green energy projects and phase out the insurance of coal mines to encourage the shift. Providing insurance coverage for these new risks will also be required, with tailored EV and renewable energy project policies designed to support both consumers and energy providers.

Increased frequency and severity of extreme weather events

Increasing air and water temperatures have led to rising sea levels, higher wind speeds, more intense drought and wildfire seasons, and heavier flooding. Not only are these extreme weather events occurring more frequently, but the severity of their impact has also grown.

The global economic effects of natural disasters are huge. Data from Munich Re shows that weather-related catastrophes have caused losses of $4,200bn since 1980 and killed nearly a million people. Of these losses, only a third were insured. This protection gap is most prevalent in less developed countries, meaning extreme weather events disproportionately impact lower-income nations.

Insurers’ ESG strategies will likely revolve around improving the climate risk resilience of insured customers, businesses, and properties. Advancements in risk modelling will help insurers manage their exposure to climate risk while also limiting uninsured losses. Regulators will be looking to insurance companies to close the protection gap and make natural catastrophe coverage more accessible. Parametric insurance has emerged as an innovative approach to mitigating weather-related risks, particularly in the agricultural sector. This type of insurance covers the probability of a predefined event happening and pays out a pre-agreed amount if the condition is satisfied.

This is an edited extract from the ESG in Insurance – Thematic Research report produced by GlobalData Thematic Research.

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