Events that have an increasing impact on society
ESG risks are uncertain conditions or events which have effects on society and may cause significant negative impacts. In the last decade, ESG risks have been increasing, so they are becoming more important for insurers. Globally, ESG risks may materialize in major events with severe environmental, social, and economic effects, which are not limited to one country but may affect larger regions.
ESG-related risks, once considered emerging issues, are now much more common. These issues can no longer only be left to governments or non-governmental organizations; the market and companies must also play a key and more active role in understanding and addressing these risks. Companies must search for ways to eliminate or reduce ESG risks; if not possible, they need to adapt and be ready to manage them when they materialize.
To address the changes related to ESG risks, insurers offer products that consider environmental, social, and governance factors, so that clients have a wide range of insurance to face these risks and a suitability assessment to prevent them from materializing. Depending on the insured people’s characteristics (economic activity, location, and working conditions, among others), insurers provide advice on those ESG risks to which they may be exposed so that they can take the corresponding actions to prevent and mitigate their materialization.
The insurance sector has been supporting the change to a more sustainable economy through products that allow householders and companies to be safe in the future; insurers offer protection and financial support for events that could affect them. There are two very important aspects for this change: prevention, which contributes to the mitigation of ESG risks, and the promotion of long-term sustainable investments.
Insurance that protects against environmental risks
As climate change effects become more severe at the global level, their consequences are more common and have a greater impact. Currently, insurers offer different products that cover environmental events such as floods, earthquakes, and fires; some of them are mentioned below:
- Parametric or index-based insurance: it is triggered when a predefined catastrophic weather event occurs and it causes assets and investments losses.
- Crop and livestock insurance: it protects crops and animals against extreme weather events.
- Engineering or technical insurance: it covers the damage to products when it is due to climate events.
- Energy efficiency insurance
- Car insurance: it protects against damage to the vehicle due to weather events (basement flooding, hail damage to the windshield).
Insurance companies also provide advice to their clients in order to prevent and mitigate the materialization of environmental risks, through talks and information intended to help them make the best decisions for managing their risks. They also use geo-referencing systems to measure vulnerability to climate change, such as Fasecolda’s risk underwriting tool.
Insurance that favors social protection
Insurance also covers social features such as accidents, death, inclusion, and lack of pension contributions, among others. These risks are covered through products like the following:
- Life insurance: it guarantees that, in the event of death, the beneficiaries will receive the amount set in the policy.
- Accident insurance: it provides compensation in the event of death or disability due to an accident.
- Social security insurance: it guarantees that people who contribute to the pension system receive the payment of the pension in the event of being declared disabled due to an illness or an accident.
- Collaborative insurance: it provides coverage to people who share similar interests (covered by the same type of policy). The insurance can be used by one of the members to cover an event, with the approval of the other members, or at the end of the year a bonus is distributed with the money left over from the fund after all claims have been paid.
- Inclusive insurance: it is intended to offer protection to individuals and companies that, for different reasons, have not had access to insurance.
- Microinsurance: it protects low-income people against different types of risks, such as accidents, illness, death of a family member, or natural disasters.
Likewise, the insurance companies, through the occupational risk management companies (ARLs in Spanish), offer talks on personal care, healthy eating, and well-being. They also provide information on how to prevent and avoid occupational and road accidents.
Insurance sector ESG management strategy
The insurance industry is highly vulnerable to ESG risks, compared to other industries in the financial sector; this is because they play a dual role: they manage risks through products that cover potential losses to society, and they are long-term investors that finance the real economy.
The insurance sector is increasingly affected by ESG risks, which materialize in natural disasters, labor inequality, gender inequality, abuse of power, and bribery policies, among others. For this reason, the insurance companies have been promoting products and advice that include ESG factors that mitigate, prevent, and adapt to those risks that could affect their clients in the medium and long term.
Insurers, as professional risk managers, encourage the proper integration of ESG criteria in catastrophic risks models, premium calculation, and policies. The challenge is to offer innovative and specialized products that enable the development of financial resilience when facing extreme events and to encourage the assessment of ESG factors in organizations.
One of the strategies implemented by the insurance industry to address ESG factors is the management of old vehicles, which seeks to improve the condition of the vehicle fleet and the linked chain. This project was developed as an alternative to reuse and recycle vehicles. There are two management centers of this type in the country:
- Cesvi Colombia
- Centro de Salvamento Sura
In these management centers, vehicles are first decontaminated, all hazardous fluids or liquids are removed, and then they are dismantled; those parts that are in good condition are valued for subsequent sale in the spare parts market.
How are we managing them?
For the insurance industry, sustainable development is directly related to proper risk management, understanding sustainability as the ability to generate protection solutions that promote shared value, effective management of supplier networks, and responsible investment.
In recent years, some of the risks covered by insurance products have been exacerbated and new risks have raised, they require the creation of protection solutions; this impacts insurers on various fronts because the performance of policyholders is affected, as well as the sustainability of suppliers and the stability of the companies in which they invest (Jiménez, 2020).
The insurance industry promotes sustainable development based on risk management, by providing the market with value propositions that allow policyholders to effectively face current environmental and social challenges. The actions proposed for the industry focus on increasing resilience to disasters, promoting sustainable consumption and production models, and favoring financial inclusion, hunger reduction, and healthy lifestyles.
Promoting the consolidation of resilient communities is directly related to the right interpretation of risks, the assessment of impacts, and their management in advance. For this reason, the insurance sector is focusing its efforts on understanding risks and creating tools for improving their management. Developments in this field range from geographic tools that allow vulnerability assessment to systems that support accident management, or the evaluation of social problems linked to the formalization of the economy (Jiménez, 2020).
What are we going to do?
Since the Principles for Sustainable Insurance (PSI) were launched, much has been talked about the different roles from which the insurance sector can contribute to sustainable economic and social development. Based on the PSI, Fasecolda has defined three roles for the Colombian insurance sector (insurer, employer, and investor), based on the main economic activity of insurers as risk managers. Within this framework, actions have been defined for each role, aimed at managing environmental, social, and corporate governance (ESG) risks, through innovation as a vehicle to leverage solutions (Fasecolda, 2020).
The insurance sector is working to promote financial inclusion in the most vulnerable populations. New technological advances are being tried to include them successfully in order to reduce the cost of products, reach complex geographic areas and massify the delivery of protection solutions. Additionally, programs are focused on raising awareness among the population about risk and its appropriate management; in this field, educational tools are being applied to citizens of different ages (Fasecolda, 2020).
A special document on ESG issues for the insurance sector is Underwriting environmental, social and governance risks in non-life insurance business, developed by United Nations Environment Programme Finance Initiative (UNEP FI). The document is available at the following link: https://fasecolda.com/cms/wp-content/uploads/2019/10/psi-guidance-for-non-life-insurance-underwriting.pdf