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Spotlight: Why ESG and digital transformation are inextricably linked for the insurance industry


Digital transformation has been the aim of the insurance industry for many years. It has become a war cry as early adopters and new tech start-ups become increasingly frustrated at the general lack of urgency shown for getting the project done.

There are some who have dragged their heels, unsure of, or perhaps dismissive of the need to change. Others have been held back by several obstacles, the most apparent for any technology refresh being the heavy burden of legacy systems. But when it comes to motivation, there’s a new contender, namely environmental, social and governance.

ESG has moved from the realms of peripheral interest for those seeking ethical approaches to asset management, to front page news and a major focus for policymakers, regulators, corporates and consumers.

Like all ‘overnight successes’, ESG has been paying its dues for decades, chipping away at the prejudices that held it back.

Severe weather patterns have already resulted in fires in drought hit areas, and severe flooding causing massive infrastructure damage with some fatalities. This is no longer confined to developing nations without the wherewithal to manage extreme circumstances, but G7 Nations like the US, UK and Germany and G20s like Australia.

People will experience more flooding and water shortages and insurers will be expected to play a more active role. They must do this cost effectively and efficiently – but how can insurers achieve this if they haven’t abandoned obsolete business practices that see them rely on inefficient, siloed technology systems, forests of paper and human intervention?

A new risk in town – and it’s everywhere

ESG is a new kind of risk. It includes components of climate, transitional and social risk and are difficult to evaluate as the data is often inaccurate or simply not being collected.

Stephanie Smith, the outgoing chief operating officer at Allianz, thinks this is a problem that extends far beyond just underwriting, but also the impact of office footprints, employee consumption, company car or fleet commitments, canteens on business premises – the list is seemingly endless.

“It’s therefore crucial that any insurers truly committed to ESG need to have a clearly defined plan and embed sustainability into their processes, purchasing decisions, culture and ways of working,” says Smith. “The idea that it’s ‘nice to have’ is very much in the past.”

Smith believes the industry is well placed to adapt but cannot do it alone; there needs to be a combined effort with brokers, customers and even the regulator. She cites an example where Allianz has developed a policy of repair vs replace for motor accounts, which includes the use of ‘green’ parts.

“We’re seeing signs that customers are happy with this approach, with 86% of fleet managers saying they’re happy to take green parts. So, together we can start to make a difference and reduce avoidable waste.” But the key enabler to the adoption and implementation of ESG is digital transformation, “The most obvious benefit is being the removal of paper-based communication, but there’s also the old adage that ‘what gets measured gets done’,” she adds.

This means setting bold targets, measuring the difference being made. This will include an insistence on customers adopting digital channels to enable the recording and tracking of data at a basic level.

Legal and General has been moving towards ESG in its asset management and committed to 70% of eligible assets to be net zero by 2030.

“We’ve been doing that for quite a long time because it’s cheaper anyway,” says John Godfrey, corporate affairs director at L&G. “Why would you voluntarily keep going with something that was more expensive if you can move to digital?”

Not all customers will accommodate change, however, as one operation that needed to be staffed during the pandemic lockdown was post room seeing as, for some customers, this was their only means of communication. “This will be addressed in the operational net zero targets we have set for offices and travel by 2030 through increasing use of digital.” Godfrey claims.

Fragmented data

“Most firms realise that they need to take action to address ESG enterprise risks on both the asset and liability side of the business, but many remain at different stages of doing so,” says Meredith Jones, head of Aon’s environmental and social corporate consulting practice.

This is largely because “a fragmented data landscape coupled with evolving modelling capabilities means it can be difficult to develop, execute and disclose an ESG strategy.”

As data aggregation and modelling improve, insurers will be better placed to effectively manage and report on their ESG risks.

“There isn’t a part of our business that doesn’t need better data, and better reporting on that data.” says Ian Jacob, chief risk office at Aston Lark. “As an industry, we’re hungry for data scientists now. Like every other industry.”

Jacob believes there are three driving forces here: the demand by stakeholders around the business, including shareholders; the expectations of regulators about how businesses govern themselves; and the fact that all this will have to reported.

“Trying to achieve this manually is very expensive, so digital transformation becomes a necessity,” he adds.

Risk and resilience

ESG is inextricably linked with digital transformation because it has also not only become a risk to be assessed and covered by insurance, but also managed internally.

In 2019, UK environmental non-profit CPD’s climate disclosure project estimated that the world’s top 500 companies could potentially face $1 trillion of financial risks due to climate change. This would manifest in higher operating costs, asset write-offs and fall in demand. It is also very likely that many companies will simply become uninsurable too.

It is very likely this risk increases, as the pandemic increased the focus of policyholders and regulators – and adoption by consumers – on matters of ESG and climate change.

The best way to future proof the insurance industry is through increased resilience. That means the digital transformation that so many ‘um and ah’ about is no longer an optimised business model, but essential for survival.

Smith agrees that digital transformation will assist the response to ESG and climate change, as it supports risk management through partnerships and technologies that should minimise future issues. This cascades down the entire supply chain, improving accountability and transparency.

“On a very practical level, transformation does not have to always be exciting – basic automation can save hundreds or sometimes thousands of hours, freeing up employees to get involved in more meaningful work,” she says. “The time spent previously copying data into excel files could be for professional development, departmental projects or working groups – all of which feeds into creating a more efficient and cost-effective company.

“Digital transformation allows for different ways of working and communicating, both of which inform the culture of a business. Technology alone cannot solve such a large and urgent issue, there needs to be an importance placed upon it throughout every job role and location.”

It’s all about the culture

One of the main reasons so many business transformations fail, particularly with technology, is due to cultural obstacles.

People resist change, and in order to generate understanding and trust in an organisation the programme of change must be owned by the executive and shown to be fully backed – and resourced – by it. Trust is an integral part of the new business model. The customer lies at the heart of everything and, in a world where a switch is a fingertip away, trust in the relationship is paramount.

Some is bound with other developments in the financial services sector where open banking should allow consumers to share their data simply – not only with their permission, but at their instruction – immediately and without fear of being targeted by criminals. This shift requires the organisation to align itself with the needs of the customer. Increasingly, that means not only pursuing ESG policies, but demonstrating a real commitment for them.

Not only do insurers have to prove to regulators and customers their commitment to ESG, but also to those doing business with them.

ESG scandals, such as clothes retailer Boo Hoo in 2020, are the extreme end of a spectrum everyone will be assessing each other against. What the market thinks not only determines share price and how easily and cheaply a business can refinance, but digital factors including capabilities and cyber security will increasingly inform market value.

Analysts, like Moody’s, is not just measuring digital or ESG, but is also ensuring all suppliers increase their awareness and measurement of ESG variables.

Societal influence

Insurers could go far beyond their remit of covering risk to encouraging better environmental behaviours, suggests Callum Rimmer, co-founder of By Miles.

“Insurers really should be leveraging the fact – in motor at least – that insurance is mandatory insurance. They’re right at the front of encouraging consumers to drive less, produce fewer emissions and help reduce air pollution.”

Pricing could be influenced by societal needs, so everyone has the mobility they need while not limiting innovation.

“We do usage-based insurance, and we don’t look at the behaviour of a driver, just the usage. If we could encourage them to use a car less or to take different routes or travel at different times by providing incentives and positive feedback, that might have a substantial impact on their environment.”

The true power of data will be demonstrated in the use of analytics to better understand trends – such as climate change – and harness that knowledge to effect change, informing underwriting and cover decisions.

G Cube, a specialist insurer for renewable energy producers, is looking to greater digital integration to combat climate change and enhance the sustainability of its own business. It has launched a new data-powered insurance offering that will make use of AI-led analytics and data sets from its partner to offer enhanced terms and reduced premiums for wind and solar operating companies.

In the last 10 years, renewable energy insurance has had significant losses that have had a major impact on the market. The severity of claims has increased as the market has expanded.  By integrating data to better understand claims scenarios, G Cube aims to provide more accurate quotes and achieve better terms. This supports the sustainable growth of the renewables industry over the long term.

“Claims from equipment failure, natural catastrophe loss and contractor error have forced some underwriters to exit the market,” says Fraser McLachlan, CEO of G Cube Insurance. “To continue to offer insurance at sustainable rates for clients, we need to have deeper insights into the risk of failure and operational management of renewable energy equipment.”

Using data differently

The surge towards digital means an increasing demand for cloud computing, though it should be remembered that the cloud has a considerable carbon cost.

“We are now calculating the carbon footprint of the whole organisation and buying carbon offsets for our cloud platform,” comments Mark Musson, CEO of Humn, the company behind fleet insurance product, Rideshr. “That first step has been achieved, but the next phase is to innovate.”

Musson is looking to increase the efficiency of the algorithms and in conjunction with a partner, push everything into edge processing and run calculations inside the vehicle.

“This means running out exposure pricing algorithms in the vehicles themselves and not pushing so much data – just the outputs and events back to the cloud.”

Connectivity issues cause concern as Humn owns its own IP stacks and does not rely on third parties. “We’re looking to minify the algorithms and minimise the amount of processing we do,” adds Musson who claims they will be offering a carbon neutral insurance policy, by having the carbon offsetting embedded in the policy itself.

“While we’re not generating the emissions, we calculate what they are and offset them on behalf of all of the vehicles covered by us.”

It’s relatively early days for Musson’s product, but the digital control means net loss ratios are already “stupidly low”.

Insurance needs to evolve with the digitalisation programme as inflection points and all major transactions have been backed by insurers throughout history.  The transition might currently feel painful, nevertheless, the tools are there to help, if embraced and adopted with staff and leadership buy in. 

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