ESG alters insurance buying

by Resolve Editor Kate Tilley

The commitment to environmental, social and corporate governance (ESG) frameworks is changing how insurance is sold.

That’s the conclusion of an insurance buyer, an insurer, a reinsurer and a broker who explored the commercial reality of ESG in a panel session at WICA 2023. 

In a pre-congress interview, Nigel Jones, Manager Insurance with Aurizon, said ESG requirements could be “challenging”, particularly for organisations in the mining sector.

That included supply chain partners such as Aurizon, which is Australia’s largest rail freight operator. Its portfolio includes transporting coal from mines to ports and for domestic power stations.

Revenue exposure

Mr Jones said Aurizon’s presentations to potential underwriters for its annual insurance program have “a significant ESG component” and that has taken some of the focus from traditional underwriting.

“Sometimes it’s discriminatory. For example, if you have more than 30% revenue exposure to thermal coal, a lot of insurers won’t provide their capacity.”

Aurizon has been reducing its thermal coal exposure annually and this year it’s at 25% as it grows haulage volumes for future-facing commodities, but Mr Jones says insurers’ targets are likely to keep changing.

“Underwriting a risk on its merits is secondary to the ESG boxes that have to be ticked. Some insurers are probably frustrated by it, too,” he said.

“I’d like to see a line in the sand – currently there’s no certainty with insurers. Next year the thermal coal percentage may change, we don’t know. Potentially there are going to be many clients that will be unable to secure enough insurance capacity.”

High-quality coal

Mr Jones said clients have “a lot of hoops to jump through” to achieve insurers’ ESG requirements.

He said the industry needed to accept that “high-quality Australian coal will be around for decades, until we find a reliable alternative. Without metallurgical coal, we have no steel that is required for renewable energy applications such as wind turbines”.

Paul Lacey, Senior Underwriter with Hannover Re, in a pre-congress interview, said ESG was well embedded within insurers and reinsurers. “It’s core to what the insurance industry has been doing for a long time.

“We support the liability side of the economy through catastrophe insurance for environmental disasters, social through cover for statutory classes, like workers’ compensation, and governance through D&O and other financial lines.”

Classification system

Mr Lacey said the difference now was that ESG was being measured and the EU taxonomy, a classification system established to assist organisations to assess economic activities’ environmental sustainability, was applied in addition to traditional underwriting methodologies.

Mr Lacey said the requirement to measure ESG had opened potential new careers for actuaries who measure ESG and he predicts analytics around ESG frameworks will give all parties in insurance transactions greater certainty.

He said ESG improved the value proposition for insurers and reinsurers from traditional risk financing to commitment to public policy issues like implementing reconciliation action plans, training for diversity and inclusion, enhanced driver safety measures, and better decision making on infrastructure locations.
                                                                                                                                    
Mr Jones told the WICA2023 panel session that Aurizon had established a captive insurer to potentially fill gaps in its program.

Clients misunderstood

Caitlin Carson, Victorian Practice Leader with Marsh, told the panel session the broker had clients that were “misunderstood” by the market, including sporting bodies and gaming organisations. Brokers and their clients needed to better educate underwriters. Coming from a soft market, some clients had not been ready to sell themselves to the market.

Ryan Thomas, Manager, Financial Institutions and D&O, with Berkshire Hathaway Specialty Insurance, said good governance was “the backbone” of any well-run organisation. Corporate governance principles had fostered ESG, which was now testing and measuring goals and aspirations. “It’s a more quantitative approach.”

Moderator Melanie Quixley, a partner with Barry Nilsson Lawyers in Brisbane, and AILA’s Vice President, asked how underwriters viewed risk in light of class actions.

Mr Thomas said shareholder actions were always in D&O underwriters’ minds, particularly in Australia. Greenwashing was an emerging focus. “We’ve yet to see ESG securities class actions, but that’s coming,” he warned. “Any D&O claim is rooted in governance failures.”

Securities class actions were becoming event driven, for example, from environmental disasters like oil spills and tailing dam collapses. Data security and privacy would also give rise to securities class actions.

Mr Thomas said the risk hadn’t reduced as much as the price. The suppression of litigation during the Covid-19 pandemic had lured new capacity into the market. “It reeks of desperation a bit. They get in while the going’s good but new entrants are often first to leave when the going gets tough.”

Asked about the political backlash for ESG that had prompted many insurers and reinsurers to leave the United Nations’ Net Zero Insurance Alliance, Mr Thomas said ESG was vulnerable but needed to “find its rhythm”. It would gain credibility as people understood how it was managed and quantified.