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Environmental, Social and Governance (ESG) data and insight is fast becoming an essential factor in improving underwriting profitability.
Utilising ESG data can enhance risk assessments, improve loss ratios, product and wording innovation, and reduce carrier exposures. It’s also increasingly vital to meeting regulatory governance requirements.
However, according to a Capgemini report, relatively few insurers have begun factoring sustainability into their underwriting practices. In fact, fewer than half of property and casualty insurers embed ESG scores in the underwriting process.
This is reiterated by Marsh, who report that only 25% of insurers are developing group-wide underwriting frameworks or guidelines across their portfolio that take either climate and/or sustainability into account.
This is concerning. The risks from global warming and severe weather conditions are exponentially increasing commercial property exposures. On the liability side we’re seeing an increasing number of ESG-related lawsuits against directors and officers. Rather then being behind the curve, underwriters should in fact be on the front line of ESG transformation.
Why the reticence?
It would be fair to assume that traditional underwriting approaches are not sufficient to identify and manage the complex risks presented by incorporating ESG into decisioning. However, perhaps the biggest barrier is the persistent challenge insurers face in capturing ESG data and embedding it in their underwriting processes. Insurers face huge challenges to accessing reliable ESG data on small and private companies.
But the fact remains, underwriters assessing price and risk in an ever-evolving landscape need a clear ESG underwriting framework, and realising this vision requires them to incorporate richer data from a wide variety of sources.
It’s vital that insurers provide a clear and enhanced understanding of ESG risks within their underwriting portfolios. By incorporating ESG data insights with underwriting expertise, insurers can further advance underwriting decisioning and ensure the sustained profitability of portfolios moving forward.
The time to make underwriting more sustainable is now
Investment in an integrated view of company level ESG risks and opportunities, as part of a wider holistic single customer view, allows underwriters to understand emerging, complex, and interconnected risks and incorporate them into decision making.
This illustrates an innovative approach and commitment to delivering the most sophisticated underwriting decision-making for improved policyholder, broker and carrier outcomes.
ESG risks will only continue to grow. Those that invest now in surfacing and integrating data from the widest possible range of sources will get ahead of the game when it comes to the future of dynamic risk selection, pricing and portfolio management.
The three biggest benefits of incorporating ESG data into underwriting
Enhanced risk decisioning
ESG data can help underwriters evaluate commercial exposures to environmental risks. For example, damage to property and potential business interruption risks due to extreme weather events, pollution etc.
Likewise, insights into labour practices, community impact, supply chain vulnerabilities, workplace culture, and manufacturing processes inform underwriters of the potential for financial and legal risks, such as greenwashing, mismanagement, insolvency, D&O claims and so on.
Predictive modelling and portfolio resilience
Integrating ESG metrics into actuarial modelling can deliver refined risk predictions that minimise carrier exposures to catastrophic losses, business interruptions, liability claims exposures and so on.
ESG data and insights as part of a holistic underwriting strategy can also help insurers build more resilient portfolios, by avoiding over exposure to high-risk clients and instead pinpointing business with strong ESG performance and therefore lower risk presentations.
Businesses with higher ESG scores often exhibit reduced volatility, thanks to better cultures, safer workplaces, sustainability targets, and ethical supply chains, which also serves to improve portfolio performance. 63% of insurers say that a positive ESG profile will likely affect an insured’s underwriting outcomes, and of that group 80% believe a positive ESG profile can lead to increased insurance capacity for the insured.
Loss ratios and claim reduction
ESG data can help reduce loss ratios through improved risk selection and more responsive policy wordings.
There is causation and correlation evidence between ESG performance, risk information and loss ratios. For example, a company with strong employee health and safety practice is typically a lower employer’s liability risk.
ESG data also offers insurers the opportunity to play a more risk advisory role, thereby delivering the prevention solutions that all types and sizes of businesses need. This in turn translates into fewer claims.
Discover a better way to orchestrate ESG data into underwriting
Just as ESG data has become a huge factor in commercial banking decision-making, so it will also become more prevalent in underwriting practices, both in terms of building resilience against emerging risks and realising the opportunities presented by a more ethical and sustainable world.
There’s huge potential to use ESG data in positive ways. Not only to better triage, assess, and price risks, but to boost resilience from ESG threats, and help insurers play their part in facilitating the transition to a greener economy.
For ESG data to be effectively woven into existing underwriting processes, insurers must adjust their data architecture and redefine a data collection and analysis strategy.
Investing in a single orchestration platform that integrates ESG data (including CSR reports, sustainability reports, ratings etc) with a wide range of financial data (annual reports, credit data, Companies House filings etc,) and risk information (organisational structure, PEPs and sanctions) for a single source of truth is essential if insurers are to effectively integrate ESG consideration into underwriting decision-making.
In addition, integrating real-time single view of the client risk visibility, data-driven workflows, and predictive analytics into underwriting workbenches, actuarial tools and pricing platforms holds many advantages, including stripping out the cost of duplication and lowering the risk of data inconsistency. Meanwhile, harnessing AI-powered rules-based decisioning over this single customer view can help underwriters triage presentations faster and respond in a more agile way to customers that meet underwriting appetite.
Learn how FullCircl can redefine your approach to ESG data orchestration and improve underwriting decisioning. Book a demo here.
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