ESG Spotlight: Can SME commercial insurers drive profitable growth with ESG data?

ESG continues to act as a catalyst for change across business operations and culture, with its reach having extended to the UK SME sector. What does this mean for SME commercial insurers and can they use ESG data to better assess risk and create competitive advantage? asks Sara Costantini, regional director, UK and Ireland at CRIF 

In May this year, Insurance Post, in conjunction with CRIF, carried out an ESG survey with commercial insurers to get the inside track on how ESG data is being used to drive growth, further sustainability and protect their reputation or improve compliance. The findings suggest there are untapped opportunities for insurers to exploit.

A notable difference between SME businesses and their larger corporate counterparts is that the latter publish and promote their ESG scores on their websites. Usually, ESG data from SMEs has to be sourced by lengthy questionnaires, drastically slowing down the onboarding and renewal process and creating a barrier to sale for insurers and their brokers. Unsurprisingly, as a result, this information is often lacking at best, or completely missing.

Today, new SME ESG data and insights, going far beyond the traditional environmental information, are easily accessible; requiring only the company registration or VAT number to gain an ESG score and granular ESG indicators, with no engagement necessary from the SME.

As an example of the breadth of insights available, insurers can be armed with valuable customer understanding covering emissions, waste production, water usage, health & safety records, modern slavery, diversity and inclusiveness.

With this in mind, are commercial insurers embedding ESG data in their internal processes? And if not, why not? There was broad agreement from 69.3% of survey respondents that ESG embedded data could help them better assess their clients’ risk and optimise pricing in the near future.

Meanwhile, however, nearly a quarter of respondents (23.2%) are not yet using ESG indicators for risk assessment. Reasons given included that this had not yet been factored at Board level or they were still designing their ESG roadmap or had not fully implemented it yet.

Only 2.3% of respondents strongly agreed that ESG data was embedded in their internal processes to include underwriting, pricing, mid-term adjustments and renewals.   

When asked if ESG data and analytics can deliver pricing competitiveness by exploiting a proven, strong correlation between ESG key indicators and loss ratio, 57.2% either agreed or strongly agreed whilst 42.8% expressed some doubt.

There appears to be a common, underlying feeling that there are benefits to be gained. Robust supporting evidence would reinforce the thinking and create a compelling business case. Fortunately, opportunities are now available for insurers to run data pilots to unequivocally establish the value of SME ESG data and demonstrate the correlating improvements in loss ratio.

ESG is a dynamic environment and the nature of associated risks are increasing in volume and type.  Those risks that have been historically very tangible to underwriters, such as physical damage caused by floods, storms, heatwaves, cold snaps and landslides, all featured highly as climate change risks evaluated in pricing and underwriting; floods and storms coming top of list.

Interestingly, disruption caused by transitioning to a greener economy was evaluated in pricing and underwriting by only 17.6% of respondents; a surprisingly low proportion considering the published regulatory goals in the UK.

This raises the question as to whether ESG is still being predominantly treated as a traditional environmental risk by insurers? Access to data and insights with a far greater range of ESG key indicators would help to give insurers a broader view and enable them to accurately manage today’s risks and plan for emerging risks.

Similarly, although the majority (30.8%) of respondents confirmed that they review their ESG data quarterly, if those reviews are limited to an extent by an underwriting focus on traditional climate change factors, then future and current opportunities and threats could be missed.

Investing in ESG data can benefit an insurer’s business across all stages of the insurance cycle and proposition. It is widely publicised and acknowledged that consumers, and especially the younger generations, who feel the urgency of environmental risk, are increasingly showing preference for environmentally friendly, ‘green’ products, and for financial service providers that embrace and promote ESG principles.

There is a striking opportunity for commercial insurers to develop ‘green’ insurance propositions to gain competitive advantage and drive growth in their markets, while furthering their own sustainability journey, brand and reputation.

Access to previously unavailable SME ESG data and insights can be used to inform product design and gain market traction by recognising and supporting SMEs on their ESG journey, by making them aware of their impact and identifying environmental, social and governance vulnerabilities to better protect their business and assets.

Presently, 37.3% of respondents have not created green insurance products despite current ESG initiatives and regulatory framework.

Similarly, only 17.6% confirm that ESG data is wholly embedded in product and service development. Some 56.9% claim it is partially embedded and 19.6% say it is something they are looking to address. The early adopters of this strategy are set to make great gains.   

Protecting the environment for future generations, supporting the transition to a green economy, fully understanding the ESG impact of commercial clients and prospects to inform decision making and boost profitability, and being at the forefront of regulatory compliance are all very real possibilities for commercial insurers.

Easy access to rich, accurate ESG data, beyond purely environmental factors, which can be seamlessly integrated within insurers’ internal processes offers a clear way forward. The question we should be asking is not if, but when will insurer engagement reflect the size of the prize?

There is considerable disparity across the market currently in the level of detail to which insurers are refining and embedding their use of ESG data across their businesses. This represents a real window of opportunity for the early adopters to protect, innovate and grow their businesses, profitably and at speed.   

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