ESG data requirements for underwriting 

Earlier this year, Oxbow Partners and Better Insurance Network published a report on ESG data for underwriting, highlighting the need for greater industry collaboration in a challenging and fast-moving ESG data environment.

The report, ESG Data For Underwriting Strategy – standardisation and collaboration: How insurers can capture and implement ESG data more effectively and lead the transition to a sustainable economy, was co-authored by Miqdaad Versi, partner and head of ESG at Oxbow Partners. Tony Dowding, editor of ESG Risk Review, talks to Versi about insurers’ ESG information requirements, transparency, ratings and the need for collaboration.

Brokers and risk managers clearly want greater standardisation of the ESG information requested by insurers – is there any sign that this may happen? What is holding this back?

Miqdaad Versi: There are attempts to standardise questions – we see examples from the LMA, for example. The challenge is that collaboration is not straightforward, especially as everyone is at different maturity levels in their ESG journey. As more understand the issues better, this will happen – even if it takes time.

What is stopping insurers being more transparent about how ESG data is being used in the underwriting process? Is it that many insurers aren’t yet sure themselves?

Versi: The vast majority of insurers are not using specific ESG data in the underwriting process (other than ‘is this company primarily in tar sands/Artic drilling?’) at an insured-by-insured level. It is therefore hard for them to be transparent about its usage. In the longer term, as insurers develop their approach, greater transparency will be possible. One option of the future approach would be where capacity, price, or longer-term relationship have an (even partial) dependency on specific ESG-related criteria (most likely emissions); another option is that there is no insured-level dependency but the reason for collation is for steering the portfolio, leading to certain UW decisions – an approach that may make transparency harder.

The report mentions that capturing reliable ESG data is challenging as sources are disparate and often inconsistent. Are the disclosure frameworks that are designed to address these challenges also inconsistent? Is anything being done to try to remove the inconsistencies?

Versi: There is a move towards consistency across disclosures, with the International Sustainability Standards Board (ISSB) standards aligning to the Task Force on Climate-related Financial Disclosures (TCFD). That is likely to continue.

Are there some lines of insurance where ESG data is consistently requested? Will it become standard practice to request ESG data from insureds and brokers across all lines of business?

Versi: My expectation is that requesting emissions data will be standard practice across all lines of business. For other ESG, I think it will take some time.

Can third-party ESG ratings be trusted? Are they of value, or is the proliferation of ratings and similar rendering them less useful, both to insurers and insureds?

Versi: Insofar as the ESG rating agency limitations are understood, they are of value. However, their limitations are often not understood and the wrong inferences are therefore drawn. Let’s say, for example, on emissions, the ESG rating agency data is based on public disclosures and as such, are likely accurate – even if they do not cover a wide enough range of companies.

Which classes of business are seeing insurers use ESG data in the underwriting process?

Versi: Different lines of business are using different types of ESG data – we cannot see ESG data as a single grouping! For example, higher carbon emitting lines of business (eg energy) are using emissions data; D&O are using governance data etc.

How is it being used? Is it just about exclusions, or is it affecting pricing, terms and conditions, capacity etc? Is ESG data being used to in any way reward insureds with better coverage? Will this eventually come?

Versi: It is not currently affecting pricing, T&Cs and capacity for most. However, as the approach develops, we will see a more sophisticated thought process of how ESG might change coverage. There are examples where capacity is increased where ESG data is provided, for example, but this is an exception, rather than the rule.

Will technology, AI, automation etc potentially play a role in ESG data collection?

Versi: Maybe for some qualitative data sources. However, for the ones being used now (in particular emissions), the barrier is not capturing the data, but that the data is not disclosed by the insured.

The report highlights the need for collaboration in the market. Is this about brokers and insurers agreeing standardisation of data requirements, or broader best practices etc?

Versi: Collaboration is far broader than data requirements. It includes methodology and approach for new areas (eg the target-setting protocol for net zero); it includes designing solutions for vulnerable people in the global south (eg the work done by the Tripartite – Insurance Development Forum, the German Federal Ministry for Economic Cooperation and Development (BMZ) and the United Nations Development Programme (UNDP); and it includes supporting best practice wherever it can be found (eg the seascape work by Convex).

The report also points to conflicting broker and insurer interests leading to differing opinions on who should lead the ESG data conversation. How can this be resolved?

Versi: This is best resolved through working together. The more there is understanding about where there is commonality in interests, the easier it is to circumnavigate the differences. We have worked with senior management teams where there are vastly different views, but converging to an agreed way forward is possible!