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Fresh ESG risk capacity heralds new underwriting era

Someone once said the future arrives before the past has completely gone. It’s certainly true of the insurance business, where old practices persist often under the same roof as groundbreaking initiatives.

The recent announcements that Beazley and global broker Howden are both separately planning to launch sustainable insurers in London came hard on the heels of insurers coming under fierce attack for continuing to underwrite fossil fuel facilities.

Howden announced the launch of Parhelion, describing it as “the world’s first fully sustainable insurer”. Targeting a capital raise of $500m, Parhelion is being advised by Howden Capital Markets, which provided its seed funding, and TigerRisk Capital Markets & Advisory.

Parhelion intends to deploy an underwriting approach based on data, technology and proprietary ESG criteria. It’s basing its method on empirical studies that show a strong correlation between corporates with advanced ESG credentials and low insurance claims, enabling Parhelion to offer premium and cover at advantageous terms.

Meanwhile, Beazley has revealed that it is preparing to launch a consortium that will automatically provide additional capacity to corporate clients who meet predetermined ESG standards. Beazley’s route is to create a Syndicate in a Box (SIAB) at Lloyd’s that would provide follow capacity and an opportunity for third-party capital providers to place capital into an ESG insurance facility.

“On the underwriting side, we believe firms that consider ESG principles are likely to be better risks long term and we anticipate ESG becoming a more significant underwriting factor over the next few years,” Beazley said in a note.

Parhelion said it aims to provide both traditional risk coverage and offer new ESG-specific products for risks of the future, “meeting the varying requirements of a wide range of corporates”. The latter grouping includes those already highly ranked on ESG criteria, as well as those just starting out on the carbon-transition journey.

Beazley said it is in the process of developing its new insurance solution. It will (subject to regulatory approval) be designed to provide new capacity for clients that perform highly against established ESG metrics, and for risks that meet the threshold to be given access to high quality, A-rated capacity. The SIAB will initially target short-tail classes such as property D&F and marine.

“We plan that internal assessments by our responsible business team and external ESG-scoring specialists, will be used to evaluate the performance of clients against a number of pre-defined ESG metrics,” Beazley said.

Both Parhelion and Beazley aim to start underwriting from 1 January 2022. Co-CEOs Julian Richardson and David Cabral will lead Parhelion, and will be joined by former Dale Underwriting executive Chris Sharp as chief underwriting officer in September 2021.

The news from Beazley and Howden is a counterpoint to the demonstrations seen in EC3 recently. In June, Extinction set off a stink bomb in Lloyd’s’ main entrance on Lime St. The protest highlighted the groups’ demands that the UK government and insurance industry stop supporting the west Cumbria coalmine and all other fossil fuel projects.

Insurance Rebellion said Lloyd’s’ coal exclusion policy allows syndicates to take on new business in coal for the whole of 2021 and keep that business until 2030, while not limiting oil and gas insurance at all.

In May, climate campaigners from across the world called on AIG, Lloyd’s and Tokio Marine to immediately stop insuring and investing in coal. The Insure Our Future activist network placed a full-page ad in the Financial Times, calling out the insurance “laggards”.

ESG underwriting is a long away off going mainstream. A survey of carriers by AM Best late last year found that the greatest proportion of respondents – just over a third – felt that the importance of ESG factors within the underwriting process was “moderately important”. Only 14% of respondents felt it was “extremely important”, with nearly 10% replying that it was “not important” for insurers to factor ESG into their underwriting.

Only a third of the survey participants said their company had taken meaningful underwriting action in relation to ESG risks, such as exiting certain lines of business or not renewing contracts. Another 7% indicated they intended to do so in the next 12 months, while 44% said they had not exited or non-renewed contracts for ESG reasons, and had no intention of doing so during the next 12 months.

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