ESG insurance underwriting

Moody’s ESG Insurance Underwriting solution helps P&C insurers operationalize ESG risk assessment in their insurance underwriting workflows.

(Re)insurers use the insured’s ESG performance scores in their underwriting and portfolio management decision-making processes. This acts as an extra datapoint in the pre-bind risk selection based on their own view of ESG risk. In addition, post-bind, (re)insurers can engage with their insureds, explain their approach to ESG, and obtain information on transition plans.

P&C firms face increasingly complex and interconnected risks, including those arising from ESG factors. Additionally, (re)insurers need to effectively demonstrate how they identify, manage, and mitigate these risks as well as demonstrate their net-zero commitments, especially where reputational risks are high. In addition, new avenues of capital-raising can be explored where ESG transparency is needed.

With growing societal, governmental, and consumer attention, P&C insurers are just beginning to understand how ESG affects everyday business operations. P&C insurers can gain a competitive advantage by creating their own view of ESG risks.

By gaining perspective on ESG risk drivers in their portfolios, insurers can redefine risk appetites and incorporate ESG factors into underwriting and pricing decision-making processes. By reinforcing their expertise in ESG underwriting, (re)insurers can more meaningfully engage with their insureds — especially those with emission-intensive activities — on their decarbonization strategies and net-zero transmission paths.

The three pillars of an ESG insurance underwriting framework combine public and private company data, risk assessment, and analytics.

• Data management and validation: This includes corporate data on both public and private entities. This is necessary for insurers to identify the correct insured entity, unlocking the main information and datapoints.

• ESG risk assessment: Capture additional ESG-related information to make an ESG risk assessment. This requires insurers to redefine their underwriting risk appetites. An assessment typically combines a multi-step approach using ESG scores, ESG data, revenue data, and an overall assessment against defined criteria and categories.

• Analytics: Portfolio composition and point-of-underwriting risk analytics derived from the risk assessment help insurers identify the accounts that contribute to portfolio-level ESG performance both pre- and post-bind.

Common challenges include linking the insured entity to an ESG score and providing ESG scores for private entities.

Insurers are good at knowing what is insured, but there can be data challenges tracking who is ultimately insured. This usually arises from a lack of information provided at pre-bind, especially where data is provided via binders (a written copy of the binding agreement between the insurer and the insured). This creates complications when trying to tie the ultimate insured to an ESG score, especially where some companies may contain similar names to others or data input errors.

For ESG scores, most insured portfolios are composed of public and private entities. Private entities are much less likely to participate in ESG reporting compared with a major corporation such as a Fortune 500 or FTSE 100 company.

The solution to both issues is to source ESG data from vendors who can also provide a name-matching service to ensure the correct ESG score is applied to the relevant insured entity.

Approaches differ by insurer and are aligned to their own policies, procedures, and processes. Insurers need sufficient datapoints for each prospective insured to support high-quality ESG scores across the portfolio of insureds, particularly for unlisted companies.

The right data on private and public companies is essential. For example, the underwriting process requires data to identify the correct insured entity, unlocking the appropriate ESG score and datapoints to build an understanding of ESG’s impact on the portfolio.

Information then flows to the assessment framework, integrating ESG scores into underwriting selection decisions. Insurers can also add their own views of ESG risk and specific customer weighting for ESG factors. Finally, all the data and decisions made feed reporting on ESG performance to internal and external stakeholders.

ESG solutions for insurance underwriting vary from raw ESG data to the application of solutions from the investment side to integrated ESG underwriting solutions.

ESG underwriting solutions cover data, analytics, and technology tailored specifically to address the challenges P&C insurers face. Achieved progress includes:

• The development of commercial ESG data solutions such as Moody’s collaboration with Chaucer to create the ESG Insurance Underwriting Solution.
  

• Collaborative efforts to standardize the data collected from policyholders. Each organization then decides how to use the data.

• Sector-specific emissions data initiatives such as the Poseidon Principles for Marine Insurance.

ESG underwriting helps mitigate risk by providing investors with an unbiased view of the underwriting portfolio from an ESG perspective.

As P&C (re)insurers continue their ESG underwriting initiatives, the door is open to build competitive advantages and identify new business opportunities by imposing their own views of ESG underwriting risks, redefining risk appetites, incorporating them into the decision-making process, and critically engaging with insureds.