How ESG considerations are changing the InsurTech landscape

As the spotlight on Environmental, Social, and Governance (ESG) issues intensifies, insurance companies are faced with the complex task of aligning their strategies with the broader ESG landscape. As new research from Solera surfaces suggesting that customers are increasingly seeking proof of ESG commitment, FinTech Global examines how these ESG considerations are affecting insurers.

ESG considerations have become a focal point for insurance firms, presenting a multifaceted challenge that can be difficult to quantify. Carriers are often grappling with the prospect of how to transition from short-term ESG initiatives to long-term strategic changes. The complexity escalates when factoring in third-party risks, diverse business portfolios, and the extended supply chain, all of which demands additional oversight.

However, ESG is no longer an optional endeavour, in fact, it has assumed paramount importance for organisations, customers, investors, and regulatory bodies.

Insurance companies that can authentically showcase their ESG values stand to gain not only customer trust, but also fortify their business resilience, effectively shielding against reputational harm.

An aforementioned recent study that was conducted by Solera has revealed that the vast majority of insurance customers are keen on seeing insurers practice what they preach when it comes to ESG performance. So much so, that three-quarters of customers are willing to switch to, or remain loyal to an insurance company that can substantiate its commitment to environmental friendliness.

The research involved surveying 10,000 drivers and 500 claims experts, and underscores a growing appetite, especially among policyholders, for insurers that prioritise a strong environmental performance.

Navigating the terrain

In this dynamic landscape, insurance companies find themselves at a crossroads, when embracing and implementing genuine ESG principles that not only meet customer demands, but also position them to thrive in a changing world where ESG considerations are increasingly integral to business success.

When quizzed upon how the growing focus toward a more ESG-focused world has impacted her businesses’ overall strategy, co-founder and COO of cyber-risk specialists KYND, Melanie Hayes, said, “The growing emphasis on ESG factors highlight the necessity for holistic risk management, including cyber security, which is now a significant ESG component. Traditionally, cyber security wasn’t central to ESG practices. However, with the rapid advancement of the digital economy, widespread remote working adoption, and the rise of high-profile data breaches and ransomware attacks and their real-world impact, cyber risk has gained critical importance within the ESG landscape. As stakeholders, including investors, customers, supply chain partners, and regulators increasingly demand stronger cyber security measures and greater transparency in data protection, companies are compelled to integrate cyber risk management into ESG governance frameworks.

“This shift will help enhance their cyber resilience in today’s high-threat environment, demonstrate ethical commitment, and foster trust for long-term sustainability in the digital era,” she continued.

Even more so, regulatory challenges are rising high for many in the insurance space, with an incredible amount of pressure now being pushed forth towards incorporating ‘green’ investments. Formidable challenges are also arising in the form of climate change exposures, necessitating a re-evaluation of underwriting strategies and potentially prompting portfolio adjustments.

However, despite the obvious challenges that tiptoeing around these dynamic regulations provides, some in the industry believes that this now offers them a chance to show resiliency and capitalise, as challenge and hardship undoubtedly breeds innovation.

Hayes said, “The evolving regulatory landscape presents both challenges and opportunities. Challenges may include the complexity of adapting to dynamic regulatory frameworks and varying global standards. Yet, it offers opportunities for innovation, collaboration and enhanced cyber security practices, fostering a more resilient and responsible digital environment aligned with evolving ESG expectations.”

Capitalising on data when dealing with ESG

One main idea that is often perpetuated when discussing ESG considerations throughout the InsurTech sector, is the concept of using data to to assess the ESG profile of a risk. This new dimension takes a similar form to that of underwriting, as many firms are now utilising data analytics to determine the amount of coverage they need through the use of quantifiable figures.

Understanding the links between ESG factors and financial-risk metrics also gives carriers a clear opportunity to understand how societal risks effect the prosperity of businesses they may cover, giving them a more mature, and seasoned analysis of risk.

Moreover, the idea of analysing ESG data gives insurers another lens in which to analyse risk selection and appetite, giving company’s a clear opportunity to broaden their own horizons and gain a competitive advantage.

Hayes agreed with this analysis, stating, “By integrating cyber security metrics into their ESG assessments investors and insurers can gauge an organisation’s environmental practices and its commitment to security and risk management. Acquiring such data can be achievable through access to real-time, reliable insights into an organisation’s cyber risk exposure.

“This would enable financial services specialists to assess their portfolios’ overall cyber readiness, identify and prioritise vulnerabilities within their portfolio organisations’ infrastructure, and allocate the necessary remediation efforts to prevent potential cyber incidents, thus protecting themselves from claims and/or losses.

“But given the complex and ever-changing nature of cyber risk, financial services firms often grapple with insufficient in-house risk information for their decisions. Fortunately, the rapidly expanding InsurTech market already offers readily available, effective risk intelligence and risk modelling solutions, including those provided by KYND, to tackle this challenge,” she continued.

Future trends

As we look to the future in regards to ESG considerations, it seemingly promises an unwavering commitment to these tenets which certainly transcends mere trends. ESG has rapidly evolved into the linchpin that unites various facets of modern life, with an emphasis far more pronounced than could have been envisaged a decade ago. This seismic shift underscores the growing recognition of sustainability, social responsibility, and ethical governance as fundamental guiding tenets, impacting everything from corporate strategies to government policies and individual choices.

In the eyes of Hayes too, the role of ESG is only just beginning in the space, with a much larger pressure for change still to come in the realm.

She said, “In the pursuit of a greener economy, we anticipate that ESG considerations will play an integral role in insurance, impacting underwriting criteria and risk assessment. Insurers may incentivise organisations with strong ESG practices, promoting a culture of cyber resilience and sustainability. This transformation will fuel innovation in the InsurTech sector, where technology-driven solutions will aim to address the evolving requirements of ESG-centric cyber risk management.”

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