MBA Determination. Executive Oversight. Actionable Solutions.Fox Management Consulting

Risk, Sustainability, and Corporate Resilience

April 8, 2012 //

The risk and insurance industry fills a unique role in the world’s economy as a private market mechanism for the sharing of risk, with the global pooling of what would be risks otherwise borne solely by the individual and/or entity estimated at US $100 trillion.   As this risk pooling is instrumental for creating the resilience that underpins the efficient functioning of economies and societies, the insurance industry is clearly a legitimate object of public policy.  As the risk pooling afforded is only possible with investors’ willingness to put capital at risk, value creation is a necessary condition for its continued existence.

The convergence of public and private interests in the industry are nowhere more keenly apparent than in the risks and opportunities presented by “sustainability,” the issues and factors illustrated with a “Taxonomy of Sustainability” developed at the Fox School of Business.  An EMC faculty member and MBA team conducted a global survey of sustainability and the insurance industry on behalf of the United Nations Environment Programme Finance Initiative (“UNEP FI”).  This survey had two lines of inquiry.

First, what is current “state of play” as respects the integration of Environmental, Social and Governance (“ESG”) factors in insurance underwriting?  Secondly, what is needed for the development of a more purposeful dialogue on the role of the insurance industry in response to ESG factors?  From the survey results, five broad themes emerged, each of which is discussed in depth in the publication that resulted from the survey: The Global State of Sustainable Insurance.

Dialoguing on Sustainability & Risk

  1. ESG factors influence underwriting.
  2. Proper management of ESG factors potentially enhances insurance industry earnings via avoided loss and new product offerings.  This in turn could afford greater protection for the insureds’ they serve.
  3. Given their assessment of ESG risks, insurance underwriters judge societal response for many ESG factors as under-developed.
  4. There are significant differences in the assessment of ESG factors dependent on whether an underwriter is operating in the “developed” or “developing” world.
  5. Promotion of ESG risk management and financing requires:
  • Working with a fragmented insurance industry structure to achieve integration
  • Enhanced forums for dialogue between stakeholders
  • Distinct, and sometimes new, skill sets
  • A recognition and respect for interests divergence

Understanding sustainability allows insurance companies to better understand the risks they are assuming, and in so doing, make more money – all while doing the “right” thing as well.

James W. Hutchin
Willis Research Network 

ESG Factors at work