Insurance, ESG & Data: A New Dimension in Operational Resilience

Back in Q4 2020, when we were thinking about key topics we wanted to tackle in our ongoing series of webinars focused on Growth and Resilience for Insurance firms in the 2020s, we felt very strongly that ESG would need to feature.  For me, the ESG ‘approach’ — (Environment (E), Social (S) and Governance (G) — can be understood as a wide-ranging and data-driven probe into the impacts companies have on the climate, nature and biodiversity; on their customers, colleagues and workers across the supply chain; and on Society as a whole. In many ways, it is the ultimate test and measure of Operational Resilience.   

The concept of ESG is well-established in the investment world, and a mainstream Board Agenda item for many firms, including those within Insurance.  In the second webinar in our Growth Resilience series, we decided to focus on just one aspect: Data, and specifically in the context of recent developments within Lloyd’s of London, and the changes coming for underwriting heralded in Lloyd’s 2020 ESG Report and its first-ever definition of ‘responsible underwriting’.  

Our panellists included two experts from outside Insurance: Martina MacPherson and Charles Radclyffe  as well as Peta Kilian in her capacity as a member of the Lloyd’s ESG Advisory Group, and GreenKite’s own Operations & Transformation Lead, Karen Stanford. You can view /listen to the webinar on-demand here.  

We covered a lot of ground in the 45-minute session but for me, there were 4 key takeaways from the discussion: 

(1) Values First, Action Second 

It is business-as-usual in the investment and asset management world to use ESG metrics, ratings and methodologies to place informed bets on the value generation potential and longevity of the firms they Hold, Buy or Sell. In effect, it’s a verification of ‘trustworthiness’ and an outside-in evaluation of reliable returns.  So when you’re looking inside your firm, the first questions are:  

• How do your corporate objectives align to ESG principles? 
• How do you as an individual professional want to make a difference? 

This inward focus and scrutiny will be key: determining your own standards, aspirations and objectives, with and for colleagues across the organisation should be a priority, well ahead of beauty parades for solution providers and partners. 

(2) Operationalise Your Values: ‘it’s risk management stupid!’ 

Talking Values but walking something completely different is a live and present danger to corporates of all kinds, many examples of which you can read about in the business (and mainstream) press. Our AI Ethics expert Charles shared his ‘watermelon’ analogy using the example of Boohoo, a firm that looked very ‘green’ from the outside but was in reality not prioritising worker rights – and got found out. It’s no good measuring like mad, but not having the operational controls to ensure alignment with what actually gets done. In today’s world, being a ‘watermelon’ is a reputational risk just not worth taking.  Although it’s probably worth insuring! 

(3) Metrics: Choices, Choices … 

The direct correlation between superior ESG performance and predictable value generation is an accepted norm in investment and asset management: case closed. What gets measured, against which benchmarks, and what constitutes ‘acceptable performance’, is in reality both complicated and dynamic in the 2020s. So when we asked our experts: is there one supplier, one index, one metric, one dashboard that can be created to solve all your firms ESG problems, the answer was a resounding ‘no, sorry.’ But, there are things you can do, once your Values are clear and clearly operationalised: 

• Be proactive and organised: what are you wanting to measure, and benchmark yourself against? What are the range of options to get this data e.g. research,  partnering with a data provider, internal resources?  
• Learn from the Asset Managers’ approach: there is an increasing trend for Asset Managers to actively take steps to aggregate information, taking different inputs from different providers, developing their own scoring methodologies and conducting their own research 
• Recognise that you probably already have ESG-related efforts underway, most likely in Diversity, Equality & Inclusion, pay gaps relating to gender and ethnicity, Women In Finance activities and the like. 

(4) AI & Innovation: the ‘data chauvinism’ Trap 

It’s been noted (by me amongst others!) that General Insurance has some special challenges around the use of AI driven by early (and ubiquitous) adoption of algo-driven decision-making in various product areas, especially Home and Personal Motor. The London Market is, arguably, not only taking a slower route to automation, but also with a distinct flavour of its own, notably in the rise and rise of Parametrics and algorithmic syndicates.   In the context of the recent EU proposed legislation on AI (a global first but certainly not the last), this opens another front on ESG: from AI In recruitment to parametrics, any firm looking at internal ESG ‘match fitness’ must consider the impacts, to underwriter, end-consumer and Society at large.  

What does this mean?  

• Guard against taking data and applying it in a single-minded way in order to innovate: balance the value of looking at risk at an asset level, I(I)oT and Digital Twin technologies with a keen eye on how these options can be abused and misused, data security and other liability challenges 
• As a bare minimum have your model inventory up-to-date complete with risk assessment and ensure that your data strategy includes data quality management People, Processes and Technologies (for both algorithmic and non-algorithmic data) in place that is future-=proofed for inter-operability with (the emerging) EU standards.   
• Directly connect Innovation with Corporate Governance with the clarity, intent and seriousness applied to existing Governance areas. 

A Final Thought 

The era of Insurance being an active agent of risk assessment, pricing, management and mitigation  on the basis of ESG ‘scores’ is well and truly underway: it’s a clear business opportunity for all parts of a dynamic and varied market, but it’s also a professional development challenge for individual professionals, and an internally-focused Operational Resilience ‘gap’ for many Boards and their stakeholders. Specific guidance from the LMA and Lloyd’s on the ESG responsible underwriting targets is due out in June, but growth-oriented firms and professionals will want to get on with shaping their own challenges and opportunities well ahead of that.  GreenKite is all about helping with that, on every aspect of Growth Resilience in the 2020s. 

Some further GreenKite content you may find of interest: 

(1)Insurance & ESG: Where does D&I fit in Reporting? – By Sally Blake

(2) ESG Data & Insurance Underwriting: The place to start for the non-ESG expert – By Shân Millie