How ESG is both lowering and raising insurers’ risk

Panellists at AsianInvestor’s Insurance Investment Week said environmental, social and governance (ESG) factors can help long term investing but complicate insurance risk pricing.
How ESG is both lowering and raising insurers’ risk

Insurers have a stronger impetus than other financial services companies to be ESG-friendly to minimise investment risks over the long term and to avoid damaging the environment in which their customers live. But the expansion of sustainability principles can also complicate their ability to assess and accurately price insurance risk coverage and potentially add to their business risk, say senior insurance executives.

“When you have a life insurer or health insurers investing in something that causes serious health problems, which they themselves cover, at the same time, [contributing to] biodiversity loss, and serious ecological losses, it's like an oxymoron,” said Praveen Gupta, former chief executive of India's Raheja QBE General Insurance.

“You have a situation where you are an insurer meant to be protecting someone, but at the same time, you're also the cause of that loss,” he told listeners during the ‘ethical investing’ panel at AsianInvestor's Insurance Investment Week on Friday (March 19).

Praveen Gupta, 

While ESG can therefore compliment the priorities of insurance clients, it also means the companies need to conduct added layers of checks – risk management and underwriting – to avoid being caught out as the risk of different business areas shifts in response to drives to minimise climate change. 

“The basic issue is the disconnect between pricing and externalities. If you don't price a risk correctly, and if you buy a few underwritten bad risks which are going to impact sustainability, you're creating a portfolio of investment which will haunt you someday,” Gupta explained.

“One [potential form of externality that could be mispriced] is stranded assets. You know, that's a phraseology that has entered the insurance business rather late,” he added. “When you insure things like we've seen in the US, such as the insurance of coal mines, petrochemical pipelines, assets on a waterfront – all of these are going to come and haunt you as stranded assets.”


While insurers in Asia Pacific grapple with the potential risk of ESG considerations on their insurance policies, they are increasingly incorporating the principles into their investment approaches.

In 2020, 82% of Asia Pacific insurers said ESG is one of several considerations when making investment decisions, up from 53% in 2017, according to the Goldman Sachs Asset Management insurance report published in July 2020.

This could be attributed to the fact that financial institutions, including insurers, have started to accept that ESG can bring good returns, the panellists said. And there seems to be a growing acceptance and considering long-term ESG risks is necessary for long-term investors such as life insurers.

“In the past 30 years, asset managers have proven that companies with lower ESG ratings tend to underperform,” Sophia Cheng, chief investment officer of Taiwan’s Cathay Financial Holdings, said at the same panel. “There's a mainstream thinking in the world now, that corporate long-term earnings will not be sustained without sustainable environment and a stable, peaceful society.”

However, there is still room to grow. Only 12% of insurers in Asia view ESG as a primary consideration, according to the survey. In addition, insurers, along with other financial institutions, could do with a longer-term view of ESG investing.

Gupta said insurers should take a less selfish view of ESG.

“We tend to look at ESG as protecting our balance sheet rather than protecting the global environment and the biodiversity. And if they don't protect that, then we have a problem because ultimately, the returns on investments and everything else will get compromised,” Gupta said.

Gary Brader, group chief investment officer at Australia's QBE insurance, took a more optimistic view.

“We want both. We want returns, and we want to do some good,” he said. “It's increasingly easy, in fact, to find likeminded organisations that want the same thing, and that are constructing investment opportunities along those lines.

“So, we don't see it as a balance - we require any asset coming into the portfolio to pass the gates of having a decent risk adjusted return and the extra layer of having a measurable, deliberate, environmental or social positive impact.”

Sophia Cheng


To do so, life insurers require strong data sources to be able to measure the impact of their efforts, Brader said.

Cheng concurred, adding that gaining the support of senior management was probably the most important element to ensure a culture of ESG permeates a life insurer, from the chairman and board down.

“Over the past year, engagement and ESG information disclosure are the most important areas we have chosen. We put out a lot of time educating our employees – the key is not to have just a framework where you ask people to do work and tick a box,” she said.

“We do have an ESG integration framework like everyone else, but we care more about the engagement of our employees.”

AsianInvestor's online Insurance Investment Week conference was held from March 15 to 19. 

This article is been edited to clarify a quote by Praveen Gupta.

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