Regulatory/Law
ESG Comes to the Fore
Many insurance companies look at environmental, social and governance criteria as part of making future plans.
- Howard Mills
- October 2020
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The insurance industry has been a leader in ESG—the recognition that sophisticated approaches to environmental, social and governance issues have an impact on a company's success and profitability.
In the world of corporate governance, 2020 will be remembered for bringing ESG to the fore across all industries. The coronavirus pandemic. Economic devastation. Civil unrest amid calls for social justice. Natural disasters. 2020 has had it all and insurers are drawing upon ESG principles to respond.
Regulators as well as investors and other stakeholders are increasingly focused on the holistic ESG approach focused on anything that could have an effect on a company's financial performance. Let's take a look at ESG's three pillars in the context of an insurance company operating in 2020.
Environmental: Insurance companies—particularly reinsurers—were early to the cause of climate change, documenting its reality and warning of its impacts. 2020 has seen major losses from wildfire, tornado and hurricane—the frequency and severity of all driven by climate change. Water scarcity in the near future will afflict vast areas of the United States and around the globe. This will impact many aspects of business operations, with supply chain but one example. Insurers will be there for industries that suffer business interruption and other losses due to these environmental factors and they are working now to mitigate future losses.
Social: Among many social risks employees and cybersecurity are prime examples. All insurers have had employee safety and well-being as top priorities from the onset of the pandemic. Companies that continue to do their best for their employees, emphasizing well-being, work flexibility, and mental health will come out on top from a talent and reputation perspective. COVID-19 forced all insurers to adopt virtual work but those that were already equipped and had robust cybersecurity and data privacy practices in place were well-prepared.
COVID-19 has highlighted the importance of safeguarding employees' health and safety, as well as ensuring cybersecurity and data privacy are continued areas of focus. Concentrating on these types of changes now can help benefit companies in a future where telework and digitalization will be even more prevalent. 2020 has seen a clarion call for social justice and insurers are working to bring diversity to the industry from the boardroom down through the enterprise.
Governance: One of COVID-19's long-term impacts will be regulatory compliance challenges. The pandemic has fundamentally changed the way that insurers interact with consumers, particularly with regard to sales of insurance products. Life insurance, for example, has always been sold in a face-to-face way. Complex products that may not always be suitable or in the best interest of the consumer require significant explanation to enable consumers to make the best choice for their needs. When the pandemic struck, insurers were forced to immediately pivot to a virtual sales model. Regulators will rightly want to be assured that product suitability is the driving factor in sales and market-conduct exams of sales practices will be with us for a long time to come.
The insurance industry exists to help industries and individuals mitigate their risks and to rebuild and recover when disaster strikes. The ability of insurers to survive periods of tremendous losses, economic crisis, social upheaval and even a historic pandemic lies not just in their size and strength of their balance sheet. It is also the ability and willingness of a business to adapt and take into account the environmental, social and governance realities of the dynamic world in which it is doing business. That has never been more critical than in 2020 and insurers will increasingly look to ESG principles to navigate the future.
Best’s Review columnist Howard Mills is a former New York state superintendent of insurance and an independent corporate director. He may be reached at howmills@outlook.com.
