Embedding sustainability requires genuine change

We hear a lot about insurance companies “embedding sustainability into underwriting”, but what does this actually mean? 

It is a phrase that can sound clichéd and empty but at Fidelis, we use it to mean something quite specific.

At the most basic level, it means something has to change in underwriting as a result of sustainability considerations being taken into account. Sustainability cannot be something done on the side, disconnected from how risks are evaluated and written – in the form of desk research or ad hoc analysis, for instance. 

There are different ways to connect the two, representing different approaches, as well as progressing stages of maturity, but some type of sustainability assessment must form part of the underwriting decision-making process. The outcome of that sustainability assessment must be able to genuinely impact or change the under­writing decision. 

Again, this could take different forms – differential pricing, capacity, terms and conditions, a novel product structure or sustainability-linked features. But if underwriting decisions always remain unchanged, we cannot really talk about sustainability being “embedded”.

When we talk about sustainability being embedded in underwriting, it means we carry out assessments of potential new and renewing business from a sustainability angle within the core underwriting process, using agreed (albeit evolving) guidelines, and with a tangible impact on decision-making.

Not just exclusions

Every carrier has its own underwriting process so the details of what “embedding” means will have to be tailored to this.

Fidelis has a unique process that involves daily underwriting calls with all underwriters as well as additional individuals across key functions such as claims, risk and actuarial. This means everyone involved in the underwriting process is aware of every contract that is written, with the ability to ask questions or challenge the proposed approach as relevant. The sustainability function takes part in these calls and is required to approve any risk that raises potential concerns.

Fidelis has a defined set of guidelines – agreed by senior underwriters and other members of senior management – that lay out the issues we look out for. These cover broad topics such as environmental concerns, animal welfare or human and labour rights, but there are also more specific guidelines for sectors, like energy, defence and forestry. The focus is on direct insurance business.

Not all potential issues are screened for, and we have identified a heat-map approach to key issues. Where concerns are identified, not all are equally serious and not all therefore require a change to the underwriting approach.

Companies may have been involved in controversies historically but have visibly improved, with clear targets in place or evidence of co-operation with relevant authorities. We do not expect perfection and will support insureds who have a less-than-ideal sustainability profile if it is clear they are committed to improving this over time.

A genuine integration of sustainability into underwriting entails some degree of change. And change implies addressing mindset and culture, with work needed to build understanding and support internally

However, we do have rules in place to ensure a consistent approach and if our requirements are not met, then we will take action accordingly. This can be as simple as asking questions to clarify existing policies or remedial actions taken. We may ask for an exclusion for an activity we are not comfortable with. For instance, we might insure a defence company but exclude ammunition. 

We may include a subjectivity in the contract wording that specifies the improvement or remediation we expect to see ahead of the next renewal, or we may seek to hold a 1-1 discussion with the insured to better understand their policies on certain issues. 

We typically explore all these options before declining to work with an insured – the latter only usually happens if the company is not willing to engage with us, or if we cannot exclude cover for certain activities. The list of strict exclusions is relatively short and includes, as per our public comments, thermal coal, tar sands and Arctic drilling.

Sustainability guidelines are therefore applied in the daily review of risks. Additionally, we collect data in relation to the referral process and the sustainability profile of our portfolio – tracking metrics around declinatures as well as business that positively contributes to sustainable outcomes. These metrics are regularly shared with senior management and our board, which is an important way to maintain transparency.

Avenues to explore

Embedding sustainability into underwriting is still in its early stages. There are a number of avenues we at Fidelis are exploring so we can  build on the solid foundation we now have in place. 

As members of the Net-Zero Insurance Alliance, we are working on our first interim targets towards net zero and the detailed implementation strategy behind this, which will necessarily involve integrating some kind of carbon budgeting into our underwriting.

We have a partnership in place with Howden to explore the links between environmental, social and governance (ESG) ratings and underwriting performance, which we expect will over time lead to tangible conclusions that will be factored into how we underwrite.

A slightly different avenue relates to developing products that support sustainable behaviours and encourage transition. Also related are our plans to increase public disclosure, for instance through our first Climate­Wise report, which will be released later in 2023. While not directly related to underwriting, public disclosure is key to driving commitment and creating accountability.

Data

It seems very few discussions about “embedding sustainability” can take place without lamenting the poor state of ESG-related data. 

Indeed, for some carriers, the focus of their work appears to be on sourcing high-quality data as a precursor to taking concrete underwriting action. The argument is you cannot take action before you have a robust picture of your existing portfolio and reliable ESG information on potential new risks.

At Fidelis we take a somewhat different view. Given the well-documented weakness of ESG data and the fact it will take years for this to improve materially, we believe we cannot make action conditional on data. 

Underwriting involves not only running models and probabilities but also applying judgment and qualitatively evaluating risk – these elements are equally important for sustainability assessments

We also don’t need to – good data is needed for some purposes, but the foundations of a more sustainable underwriting approach can be built using what we do know. 

Underwriting involves not only running models and probabilities but also applying judgment and qualitatively evaluating risk – these elements are equally important for sustainability assessments.

Using them will likely lead to better decisions than mechanically relying on ESG metrics – identifying whether a company is involved in deforestation or forced labour is more material to a sound assessment than obtaining their ESG rating.

designer491/Alamy Stock Photo

Not every insurer has the ability to carry out in-depth risk-by-risk checks, but it is absolutely worth thinking about ways to embed sustainability without getting held up by the limitations of data. Work on refining data quality is important but should not stand in the way of taking underwriting action. Collecting data should also not become a standalone goal – always think about what you will do with a given piece of information, what goal will it serve? If it cannot be used in decision-making, what is the value of collecting it?

Don’t neglect culture

What is unavoidable is the fact that a genuine integration of sustainability into underwriting entails some degree of change. And change implies addressing mindset and culture, with work needed to build understanding and support internally – this can be the hardest part of the embedding process.

It is equally unavoidable that not all companies or activities are sustainable. While engagement and collaboration with insureds is key, a commitment to sustainability requires us to sometimes say no.

This can involve some tough decisions, making it all the more important to have a strong understanding of why the organisation is going down this path and what the desired outcome is. Is it purely about generating higher long-term underwriting profit or is there also an element of simply doing the right thing (and how is this defined)?

A strong recommendation therefore is to start with principles and strategy, which will provide a solid underpinning for implementation. Why are you doing this, what are the key issues you want to address and what are your immediate priorities? Get a framework in place and agree it with senior stakeholders. Then work out how to “embed” this into the daily activities of your underwriters. 

Staying focused and always being tangible will help you not to get overwhelmed, as will being realistic and pragmatic. You will not have perfect data, you will not be able to address every topic and you will not get it 100% correct from day one. That shouldn’t stop you from making a good start.

Olivia Brindle is head of sustainability at Fidelis MGU