The insurance sector, just like its counterparts in the banking and larger private sector, is in a race against time to contribute to reversing the unprecedented adverse climatic changes, ecological degradation, and dwindling natural resources.
This aligns with global ratification during the Paris COP 2015 meeting where Kenya and 197 governments committed to marshalling forces within their borders, public and private, individual and communal to reverse the planetary crisis.
The expected actions by individuals, governments, and corporate entities are now motivated not only by a sense of ethical duty but also by a strategic adaptation to meet the evolving market demands where consumers’ loyalty is on buying products from sustainable companies.
Furthermore, investors now explicitly consider actions taken to safeguard the environment, society, and governance (ESG) as part of financial analysis when deciding which stock to buy or keep.
For any business to retain relevance and appeal to investors as well as customers it is important to embed ESG practices as part of their corporate culture as a business and as a corporate citizen.
The significance of ESG in insurance
Incorporating ESG factors into risk assessment models enables insurers to predict and manage potential losses better.
This is best exemplified by developing products that understand climate risks and apply this in coming up with pricing policies more accurately and avoiding catastrophic financial exposures.
This is vital as climate risks are projected to double by 2050, according to global consulting firm, McKinsey.
It is already happening as insured losses from natural catastrophes have increased by 250 percent in the last 30 years, according to the 2022 World Property & Casualty (P&C) Insurance Report, by the Capgemini Research Institute.
The emergence of climate-related risks brings new business opportunities.
In Kenya, livestock and crop index insurance as well as flood insurance have been introduced to mitigate perils experienced by different communities.
Lastly, consumers today are increasingly conscious of the impact companies have on the environment, their employees, and the communities they operate in.
They are willing to reward companies that prioritise ESG factors and hold accountable those that don't.
A global survey by PricewaterhouseCoopers indicates that 76 percent of consumers will discontinue their relationship with companies that treat the environment, employees, or the community poorly.
Thirty six percent of global insurers cite customers as their top priority when they are defining their ESG strategy.
By adhering to these principles, underwriters can build stronger relationships with their customers, regulators, and other stakeholders.
Additionally, good governance practices inspire investor confidence and attract responsible investments, enabling insurers to access capital for sustainable business growth.
Actions for insurance companies
To effectively respond to ESG priorities, insurance companies should consider the following actions:
First, underwriters should consider embedding ESG considerations into their company's core strategies and decision-making processes.
This involves aligning ESG goals with business objectives and ensuring that all departments, from underwriting to claims management, incorporate ESG criteria.
This would then result in the development of ESG products including policies that incentivise green practices, such as discounts for eco-friendly homes or businesses, and coverage options that support renewable energy projects.
This would be further supported by building strong relationships with stakeholders, including customers, employees, investors, and regulators, which is essential.
Insurers should actively engage with these groups to understand their ESG expectations and collaborate on initiatives that address mutual concerns.
This could also include subscribing to initiatives like the Nairobi Declaration on Sustainable Insurance and the United Nations Global Compact in commitment to furthering ESG principles and sustainable development goals.
The insurance industry stands at a pivotal moment where embracing ESG principles is not only a moral imperative but also a strategic necessity.
By integrating ESG considerations into risk assessment, promoting social inclusion, strengthening governance, and leveraging innovation, insurers can drive transformative change and contribute to sustainable development.
Recognizing the interconnectedness of their actions with societal and environmental well-being, underwriters can play a critical role in mitigating environmental risks and enhancing climate resilience, ultimately paving the way for a more sustainable future.
The writer is the Associate General Manager- Marketing at Minet Kenya and can be reached by [email protected].
