Be the change you wish to see in the world.– Mahatma Gandhi
Insurers have a once-in-a-generation opportunity to take stock and set about creating the industry they want to be part of – one that’s pushing boundaries to build upon its purpose – and become a force for greater good.
Of course there are some stepping stones and stumbling blocks along the way, but considering Luxembourg’s major role in the European insurance ecosystem, the country is in a strong position to be a part of the solution and have a say in the Environment, Social, and Governance (ESG) revolution.
Don’t have time to read the whole blog entry? Then watch our “Blog in 1 minute” video for a quick summary of its main points:
ESG is a complex and vast arena, full of potential stumbling blocks, so taking the first step (or two) could be the hardest step of all. The complexities are heightened by the crossovers and knock-on impacts between the environmental, social and governance priorities. Even knowing where to begin can therefore be challenging. That was the point behind trying to break the first part of the journey into smaller steps.
While we can’t go into all of the stepping stones in detail —that is what the white paper is for— we can give you a flavour and hopefully inspire insurers to take action.
The report breaks down strategic and operational considerations, explains ESG regulatory compliance and how risk and client demand are changing due to the green economy. It provides an insight on the ESG impact on fundamental business processes such as product design, asset management and data management and how you align this with your organisation’s digital transformation. Think of it like a roadmap to responsible growth.
Given that the Luxembourgish insurance market is one of the most mature markets in Europe, insurers in Luxembourg are in a strong position to consider how they can elevate and expand their business in the context of digitalisation, ESG, and increasing cross-border collaboration at the next level to redefine the insurance of tomorrow.
The increasing importance of standing out from the pack
I cannot say whether things will get better if we change; what I can say is they must change if they are to get better. – Georg C. Lichtenberg
PwC’s 26th Annual CEO Survey shows that CEOs across many industries are under no illusions that after a tough few years things are about to get tougher still, and that includes insurance. As they deal with challenges, such as high inflation and continued geopolitical disruption, they are exercising caution and exploring short-term measures to mitigate the impact on their business.
But at the same time, they are resolutely focussed on strategic investments, specifically into the talent and technology needed to transform their businesses and ensure long-term growth and viability.
The race for the future: The first three questions–on the potential for widespread business disruption, on corporate climate change strategies, and on the time horizons of critical risks–reflect the race that today’s CEOs must run to stay ahead of longer term threats to their companies, to society, and to the planet itself. – 26th Annual Global CEO Survey
Founded on the ability to understand risks and find solutions to manage them, the insurance sector has rarely been unsettled by emerging risks and trends in the industries they underwrite. ESG will likely be no different for insurers, presenting both challenges and opportunities (or stumbling blocks and steppings stones, to continue with our analogy).
However, insurers are no longer answerable just to shareholders, but customers, employees, suppliers, communities, the press and regulators too. These broader and more vocal groups are increasingly interested in how ESG drives corporate performance.
The greater emphasis placed on sustainable business practices and better societal outcomes has created an opportunity for responsible market participants. Those already working on specific ESG initiatives may be well-positioned to attract a greater volume of quality business.
Creating and clearly demonstrating long-term value is vital for the future of the insurance sector. ESG presents an opportunity for businesses to showcase their wider role in society, enabling them to stand out from the pack through their choice of channel investments and wider contribution to society. The share price of a company could depend on this, so getting it right is crucial.
Be the agent of change, by bringing ESG to the forefront of strategy and governance
Successful people are the change agent, they know how to turn the stumbling blocks into stepping-stones. – Ebinezar Gnanasekaran
The insurance sector’s continued success depends on its ability to find opportunities for sustainable growth in the face of ongoing uncertainty. Having demonstrated strength and resilience over the past year, through the turmoil of the sanitary and climatic crises, insurers’ strategic focus turned to what the competitive landscape will look like in the near future and what the post-pandemic reality means for their business.
This will require a period of full-scale (digital and cloud) transformation over the next 2 to 5 years–building trust and transparency (cyber-security, costs transparency, among others), and rethinking everything from ways of working through to products and business models, bringing also Environmental, Social and Governance (ESG) to the forefront of strategy and governance.
As an insurer, your business is in an ideal position to influence sustainability strategies and promote positive outcomes through your underwriting and investment decisions. This would allow you to move from simply absorbing the impact of climate change to becoming a vital enabler and accelerator for the development of a green and inclusive economy.
Businesses and consumers are gravitating towards green and socially conscious insurers. Customers rather than regulators become the most important ESG stakeholders. Many investors now also look at ESG performance as closely as financial returns when judging where to commit their funds. This presents a decisive test of purpose and a once-in-a-generation opportunity to drive innovation and growth for insurers.
Organisations should look to embed ESG considerations throughout their operations. This means looking at the financial side of the business as well as factors such as how staff are treated, including working conditions and diversity and inclusion policies. It also means doing it in a way that speaks to their purpose and goals.
Product development, asset management and the management of your own operations, including your supply chain, are the stepping stones for turning your ESG ambitions into a path of concrete actions as laid out in the aforementioned white paper.
The insurers leading the way are looking at how clients’ risk protection needs are changing and how to put these new demands at the centre of their product design. They are also bringing their influence to bear as major investors.
And to make sure they practise what they preach, they are looking at how to bring the sustainability, inclusion and ethical policies within their own businesses and value chains up to the standards they expect from clients and portfolio companies.
New rules for realities, get to grips with ESG regulation
The influx of new ESG regulations and the policy goals that sit behind it are placing a whole new set of expectations on your business. The changing expectations have significant implications for your strategy, reputation and market valuation, as well as your compliance capabilities. A lot of the rules are still being finalised and even more are likely to come in the future.
But the timelines mean that you can’t wait until everything is agreed before getting implementation underway. Further challenges centre on the inconsistencies and even conflicts between the various regulations. It’s important to be able to communicate a clear strategy, embedding an ESG-focussed culture and defining relevant Key Performance Indicators (KPIs), all backed up by firm evidence and honest proofs.
In turn, a standout record on ESG could help your business to become a magnet for talent. This includes attracting the socially and environmentally conscious generations coming out of education and into the workforce.
Insurers recognise the strategic imperative. Eight out of ten insurers taking part in our white paper want to incorporate ESG into their strategy in ways that go beyond regulatory requirements. When asked about the approach to ESG taken by leadership teams, ‘strategist’ came out on top, though there were also a significant number of pragmatists.
Sustainability used to be disconnected from important business decisions and typically revolved around minimising safety or reputational risks for the company. Those days are over. Today, companies are rapidly increasing their focus on ESG issues. Yet many executives feel uncertain about what action to take. Addressing ESG issues is so complex—and the issues so all-embracing—that they simply don’t know where to begin.
That’s where the Chief Sustainability Officer (CSO) can make a difference. One of the CSO’s key priorities—especially early on—is to make clear how sustainability contributes to the business. It isn’t an ‘either/or’ but an ‘and’. Creating that understanding and linkage of how sustainability drives value is absolutely crucial.
You also need to address how sustainability links up with and strengthens your brand story. Sustainability in itself isn’t a differentiator, so it’s important to develop your sustainability narrative.
While not a “silver bullet” in itself, a well-established sustainable lens can make a real impact connecting the dots on ESG and supercharging the sustainability transformation. The CSO’s role will undoubtedly grow as organisations continue to put ESG at the heart of their business.
This white paper reflects on our research and draws upon expert opinion from leading CSOs to review the current CSO landscape and provide recommendations on how to design an ESG governance framework that will supercharge your ESG transformation.
Remain credible and competitive
Redefine your tomorrow by overcoming today’s challenges. The insurance industry is undergoing fundamental change as it continues to face challenges from uncertainty, changing risk landscape and new regulations.
In addition, digital technology has fuelled accelerating shifts in consumer demand and mounting competition from InsurTech players. In the face of so many disruptive forces, it’s important not to lose sight of the huge opportunities that this disruption can offer. Insurers can in fact leverage it to gain advantage. For example, by enhancing the role of insurance employees with automation, capitalising on analytics for a number of reasons—improved investment decisions, better product development, pricing and fraud detection—and revamping their internal processes and customer experience.
Digital transformation is critical. But winning in today’s world requires more than digitisation. It requires understanding that the nature of competitive advantage has shifted—and that being digital isn’t enough. Embracing customer-centric ecosystems, embedding ESG in the organisation’s core, winning the race for talent, and putting a premium on execution.
So, drive innovation with ESG in mind, by elevating the understanding of ESG in your organisation, making social responsibility a core ethos of your purpose, embedding ESG in business strategy and making ESG actions and results transparent.
Convert your ambitions into actions to stay ahead of the game. Because of the broad reaching impacts of ESG across the insurance value chain, it will also be key for insurers to look to educate and inspire their employees to get behind their ESG strategy.
Win the race for talent by redefining the future of work, harnessing the power of culture, upskilling your workforce for the new world, taking advantage of the gig economy, and rewriting your human resources playbook. Considering the drive for digitalisation, ESG, and more, talent acquisition will be a key focus for insurers to ensure they have the right capabilities to grow.
Data and analytics skills, digital literacy, project management and experience with large scale transformation will increasingly be valued in the market. Building the right capabilities will be a combination of external talent acquisition and internal growth, hence insurers will also be looking to upskill their existing teams to equip them with these essential skills.
Time for solutions, not words
The climate crisis and wider focus on ESG are changing what society and your clients want from insurance and insurers. Sustaining relevance and delivering your purpose requires you to become an enabler for green transition and the sustainable economy of the future.
This is neither a straightforward nor linear challenge, with the scale of the task amplified by the uncertainty, ambiguity and inconsistency surrounding it. But with the will—and some stepping stones to get you started—there is a way.
‘Be part of the solution’ matches perfectly with the way Luxembourg life insurers can provide financing to ESG and sustainable-oriented projects and initiatives or how non-life insurers will provide new innovative insurance products to ensure society can weather as much as possible the effect of climate changes. Coupled with the heavily green-oriented funds industry, no doubt the Luxembourg marketplace and its insurance arm will have its say in the ESG revolution.
Andrew McDowell, Partner, Strategy&, part of the PwC network
Luxembourg plays a major role in the European insurance ecosystem, particularly in life, but increasingly also in non-life and reinsurance. We believe that the PwC White Paper reflects well the opportunities and challenges that the ESG presents to your businesses, and sets out approaches that go beyond narrow regulatory compliance to embedding ESG perspectives in corporate strategy in a way that can deliver strong value creation through better stakeholder alignment.
