Time for insurers to future-proof their business models by planning their ESG pathways, not just for themselves, but also for consumers.
Paul Brenchley, Partner, Financial Services Advisory, KPMG in Singapore
Cherine Fok, Director, Sustainability Services, KPMG IMPACT, KPMG in Singapore
With the recent 2021 United Nations Climate Change Conference (COP26) in Glasgow sparking renewed discussions on the insurance industry’s role in reducing emissions, Singapore insurers are also planning ahead on how to intensify their focus in this area by embedding zero-carbon targets and managing climate risks in their business and operating models.
On one hand, insurers are motivated by the opportunities of introducing new products and services associated with the emerging green economy. On the other hand, they remain concerned that physical risks from climate change and transition risks from the shift to a low-carbon economy could be so significant that it would impact the type of policies that they can offer consumers and the investments they can make.
How these considerations pan out will impact the level of coverage that consumers and companies will stand to benefit from – when it comes to climate risks – as well as how much these end-users will need to pay. Like many other sectors globally, insurers are also growing their understanding of integrating environmental, social and governance (ESG) aspects holistically as part of business.
However, responses from KPMG’s 2021 CEO Outlook survey show that insurance sector CEOs struggle to convincingly articulate their ESG story to their stakeholders (Global: 43 per cent; Singapore: 25 per cent). Insurance leaders surveyed also highlighted the need to improve the rigour of ESG performance reporting (Global: 12 per cent; Singapore: 25 per cent), as well as to address the varying ESG reporting needs of different investors and stakeholders (Global and Singapore: 25 per cent). With the Singapore insurers surveyed also noting mounting pressure from regulators (67 per cent) and institutional investors (33 per cent) for increased ESG transparency and reporting, they will need to move quickly to respond to the impacts of climate change.
Better modelling required to calculate climate risks
Climate change is set to add a layer of complexity to ESG reporting in Singapore. Owing to its geographical location and low-lying terrain, Singapore is vulnerable to a range of natural events, such as heatwaves, coastal flooding events, and heavier rain, as well as impacts from air pollution and changing disease patterns. Aside from the possible direct impact on human lives and health, the increasing push from the Singapore government for sustainability to be integrated into business and operating models — for example, in ensuring the process of constructing a building (including getting supplies) factors in ESG practices — will mean the property underwriting process will have to evolve to meet new factors.
Yet climate disasters can be costly for insurers, especially if risks aren’t correctly assessed. Hefty claims, including those related to business interruptions, property and vehicle damage, can result from climate events. Knowing who you insure and your geographical exposures is becoming ever more important.
In the long run, underwriting and asset portfolios are exposed to a host of physical and transition risks such as deteriorating health, damage to assets and the depreciation of investment values in carbon-heavy sectors.
But calculating the potential costs of climate change is no easy task, even armed with sophisticated models to predict the course and intensity of impacted sectors. Underwriters, product development teams and investment managers in the insurance sector have been busy reassessing their exposures and the sufficiency of their data to be able to evaluate future impact.
Many are seeking new data sources from their cedants, as well as from investment managers and other external sources. Risk management teams have been looking for new data sources as well to assess their wider carbon footprint. Many are finding that collecting and incorporating these data sources into their existing processes is an onerous task.
With climate change creating demand for new and innovative insurance offerings and services, alternative data sources, real-time analytics and artificial intelligence are among the technologies that are being explored by insurers.
Against this backdrop, risk managers are revisiting scenario analysis techniques to consider a range of possibilities and examine their potential impact on the organisation to understand, identify and analyse climate related risks. Hence, many insurers recognise the need to ramp up their toolbox to assess risks.
Climate change seeds new opportunities to grow business
Even as the need for digital investment is widely recognised, the technology landscapes of many insurance companies consist of legacy systems that are costly to maintain and often not able to scale to meet market demands, especially on ESG matters.
Therefore, many insurers in Singapore are looking to finetune their digital strategies, not only to drive long-term cost efficiencies, but also to generate new streams of revenue. Singapore insurance sector respondents in our 2021 CEO outlook survey unanimously agree (100 per cent) that their digital investments are inextricably linked to their ESG objectives, significantly higher than their global (76 per cent) and ASPAC (71 per cent) peers.
Through all this change, emerging innovations such as electric vehicles and renewable energy projects are seeding new revenue opportunities for insurers in terms of new insurance products as well as new investment opportunities to help them curb their own carbon footprint. Various insurance sectors, such as the property and casualty market, are set to be transformed, with a plethora of new opportunities for data-driven, AI-powered entrants.
Beyond savvier assessments of climate risks that need insurance and exploring new and innovative products and services, insurance providers themselves also need to manage stakeholder expectations of their companies’ ESG readiness. Hence this is where 75 per cent of Singapore insurance CEOs surveyed by KPMG agreed that they need to rely on external assurance of their ESG data to meet growing expectations for consistent and robust sustainability reporting, as compared to 47 per cent of their global and 44 per cent of their ASPAC counterparts.
Telling the climate change story convincingly
Yet for insurers to communicate their strategic and collective will towards supporting climate change efforts, it will take much more than storytelling efforts. The most important step will involve the policies that insurers can offer. On top of that and aligning internal operations with ESG goals, insurers should also demonstrate that they are willing to contribute to countries, societies and ecosystems beyond just benefiting themselves.
At KPMG, we will be investing US$1.5 billion over three years into ESG which includes gathering talent, building regional and global hubs of expertise to seed insights while extending resources inclusively to companies and countries.
The transformation for insurers needs to encompass a deep understanding of leading sustainability practices, climate disclosure frameworks, and the vagaries of business and operating models, as well as risk management and scenario modelling. But with the clock ticking on climate change, now is the time for insurers to future-proof their business models by planning their ESG pathways, not just for themselves, but also for the consumers depending on their policies.