Briefing: How the ESG agenda can help insurance be a driver for positive societal change

By Matt Scott

Environmental, social and governance (ESG) driven agendas are a hot topic at the moment - not just in insurance, but across the entire business world.

Insurance has long been seen as a force for change when it comes to the ‘E’ of ‘ESG’ – environmental – and this makes sense.

Climate change and the increasing severity and frequency of weather events are a major risk factor for every insurer. The solutions they are putting in place to combat this growing risk are clear drivers of change.

When it comes to the societal aspect of ESG, however, the business case is not as strong. But the moral case obviously still exists.

And with a growing spotlight on all facets of ESG, the insurance industry has a duty to act.

Underinsurance has been a problem facing the insurance industry for many years, but people are increasingly beginning to see the societal inequality that underpins many underinsurance issues.

A July 2020 study from the Social Metrics Commission found that nearly half of black African Caribbean households in the UK were in poverty, compared with just under one in five white families.

The same research found that black, Asian and minority ethnic (Bame) families as a whole were between two and three times as likely to be in persistent poverty when compared to white households.

These financial difficulties inevitably lead to people being unable to afford adequate insurance cover, or any form of cover.

Then, when a claim occurs, their financial position worsens and the cycle begins again, with people caught in a downward spiral.

The cost of living crisis is only going to exacerbate this problem, pushing many people further into poverty and creating an even larger insurance gap as access to cover becomes increasingly cost prohibitive.

And then there is the poverty premium.

Research from the Institute and Faculty of Actuaries and Fair By Design in September 2021 found that the average UK household in poverty pays almost £500 a year extra for essential services such as credit, energy and insurance – insurance is the biggest contributor to this figure.

Proving the business case

This cannot be fair by anyone’s standards.

Not only does insurance have a moral duty to help these people access adequate cover, but there is also a growing business case.

For example, technology can be a key enabler for increasing automation while also reducing costs – financial savings can then be passed on to policyholders.

Meanwhile, entrepreneurial and ESG-savvy insurers and brokers are key to designing new products that can meet the specific needs of disadvantaged sectors of society that are all too often forgotten about when it comes to insurance.

Parametric insurance could play a key role here, with its clearly defined payout structure and reduced operating costs.

The moral case for driving positive societal change has been clear for some time. Maybe now the business case is starting to become clear too.

By closing this insurance gap and providing people in financial difficulty with adequate levels of protection, the insurance industry can help relieve at least some of the pressure facing millions of people across the UK.

Not only that, but it also creates a whole new target market for brokers and insurers that come up with the right proposition to meet the needs of these demographics.

These potential customers remain relatively untapped at the moment.