How ESG could transform insurance into a more sustainable sector

Data scientists and software developers around the globe recognize Hello World as a common way programmers are introduced to coding in a new language. As climate risk comes into sharper focus in the insurance industry alongside the meteoric rise of AI, could Hello World's universality represent more than a coder's simple test phrase?

Consider this: Insurers arguably have never had greater communication gaps or reputational damage to overcome. 2023 marked another year of immense fiscal loss, with natural disasters intensified by climate change largely to blame. Meanwhile, several major insurers have exited high-risk coastal and wildfire-prone areas.

As a further complication, most consumers are frustrated and confused by their insurance policies.

Contemplating the role all must play amid growing climate risk, insurance companies are in a unique and powerful position to influence behaviors and help improve environmental, social and governance (ESG) outcomes. This is largely due to insurers' part in underwriting the activities of other corporations. As such, insurers have the opportunity to address climate risk and other ESG-related risks and subsequently further a more sustainable and responsible business ecosystem.

As insurers ride the digital transformation wave, leveraging data and AI to reap insights and enhance customer engagement, they're also in prime position to make three significant — even revolutionary — moves. The key is making ESG a common code and shared language by insurers and consumers.

1. Reimagine insurance through an ESG lens

Certainly, ESG has had its detractors. Resistance in the U.S. in recent years has especially complicated the conversation around ESG-focused initiatives in other markets.

Meanwhile, as the effects of climate change intensify, natural disasters have escalated into catastrophes that thwart best efforts to predict their impacts using historic storm data. As insurers retreat from fire- and flood-prone markets, the industry faces an existential crisis in the form of fiscal failure, mass layoffs and disrepute.

So, what makes ESG an ideal conduit to reforge the industry and kindle new connections?

A recent customer intelligence study by PwC found that 76% of consumers were willing to end their relationship with companies that treat employees, communities and the environment poorly. Aligning with those ESG-minded consumers offers an opportunity to transparently introduce trustworthy AI, demonstrate ethical awareness and provide tangible benefits to the customer.

2. Reinvigorate customer engagement with ESG

There is a hefty challenge at the beginning of the customer-insurer journey: Traditional insurers struggle finding points of contact with their customers. No claim? No contact.

ESG presents a valuable way to regularly connect with customers in ways — and on topics — that matter to them. By sharing ESG updates to open more frequent lines of communication, insurers could convey risk exposure to their customers and offer best practices in navigating policies.

Customer touchpoints could include consumer-focused education about ESG, alerts about climate risk to the customer's assets and even how to navigate fraud exposure. Routine communications of this sort could serve as an opportunity to incorporate the social and environmental impact of losses into policyholders' vocabulary, while increasing their awareness of — and trust in — the insurer.

Insurers can leverage innovative applications, precisely tuned by AI and generative AI, to help instill an ESG vocabulary in their customers. Even insurers who still rely on agent and broker networks could benefit from virtual "warm ups" through online interactions before their customers purchase a policy through physical channels.

By using AI to sift through increasing volumes of customer data gathered from these touchpoints, and in turn offering valuable information to their customers, insurers could create a more informed consumer base while becoming more effective themselves.

Of course, as customers become increasingly savvy to ESG, insurers must simultaneously address another quandary: providing affordable solutions to more people in the wake of climate change. Fortunately, data and AI can also help them achieve that.

3. Reinvent business models and products

The natural catastrophe protection gap averaged $1.8 trillion in 2022, per Swiss Re, which also found overall natural catastrophe resilience low, with three-quarters of global exposures unprotected globally. While the re/insurer won't reveal its 2023 protection gap figures for some months yet, recent research by Aon indicates that in 2023, nearly 400 natural disasters wrought $380 billion in economic losses.

2023 was a year that notably brought a record number of billion-dollar disasters, according to the global professional services firm. Today, insurance covers only a minor amount of the resulting economic losses.

Converting insurance from a damage-compensation to a risk-prevention model will be crucial. Tapping new technologies could help foster the advancement and promotion of ESG products to consumers. One example? The rapidly advancing category of programs that use cutting-edge sensors to accurately monitor tangible assets, forecast climate risk and propose mitigatory action.

As for alternative insurance models already in use that could further catalyze transformation, consider the broader adoption of a parametric insurance model. Payment triggers based on an index that acts as a proxy for possible losses. Measurable triggers and fixed compensation are agreed upon in advance, allowing for more scientific pricing and greater coverage of risks that are otherwise difficult to insure.

New technologies, including satellites, IoT data and smart blockchain contracts foster the adoption of such solutions. Caveat emptor: these advancements present a degree of complexity that must be managed well, including disparate data sources and formats, large volumes of streaming data and privacy issues.

Building a sustainable business model with trustworthy AI

Turning an ESG lens into sustainable business success will require the right mix of innovation, courage to change traditional mindsets and strict governance of the technologies in play. The possibilities of decarbonized investment portfolios, climate risk mitigation, inclusive finance and preventative insurance all represent immense opportunities for insurers.

Overall, a proper reintroduction to insurance through ESG could help insurers evolve profitably with changing times, strengthen customer relationships and foster a more positive impression of the sector overall. That, in turn, could lead to a more approachable, technologically-advanced insurance industry, greener for the greater good.

 

This article was written by Elana Ashanti Jefferson from PropertyCasualty360 and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.