With the advent of ESG as a significant initiative in the investment realm, the insurance sector is finding countless new opportunities.
That’s because, in many respects, the parameters of ESG (environment, social, governmental) dovetail with the basic and historic mission of insurance.
Consider that a primary value of insurance is to support people at those times when they need assistance, often at the most challenging times of their lives. By the same token, ESG investment seeks to build new kinds of business models that uplift and support humanity in several ways.
Take basic safety, for example. One of the most dangerous industries in our world is also among our most basic necessities – fuel for warmth and transportation. But that entails the use of fossil fuels and the deployment of highly volatile substances, such as gasoline and natural gas.
While safety standards have always been high in the energy sector, the new forms of energy favored by ESG models are far safer. A popular saying in the solar industry is:
“What happens when there’s an accident at a solar power plant? Answer: “A lot of sunshine breaks out.”
Providing coverage for clean-green energy sources naturally involves less risk for an insurance seller. You will not need truck drivers that have earned a “hazard rating” attached to their licenses to drive fuel trucks. This ensures that there is no fear of massive oil spills, explosions, and so on.
Furthermore, a well-designed risk management process following ESG guidelines offers insurers competitive advantages that result in positive underwriting results. That’s why providers would benefit from addressing climate change factors and how they can affect pricing and long-term costs.
A challenge for underwriters is in developing accurate systems for determining risk factors and costs associated with ESG business models. For example, insurers traditionally rely on historical loss data to determine how they will cover a specific company or project. New ESG-oriented models will pose different scenarios as yet unseen.
The bottom line is that insurance companies are exposed to higher risk because of the damage driven by climate change events, such as flooding, stronger hurricanes, and wildfires.
It behooves insurers to focus their business away from industries that are driving and exacerbating climate change and move forward in seeking ESG-based industries.