ESG PrinciplesRisks and terminology for actuaries to know July 2022
Recently there has been an increased focus on structuring and institutionalizing environmental, social and governance (ESG) principles for insurers. Consequently, actuaries are under pressure to stay informed about ESG investment topics and technology, embed ESG issues relevant to the insurance business in their decision-making and effectively recognize the means through which the state of an insurer’s ESG practices translates into associated financial performance.
ESG is critical to the well-being and success of an insurer. Those that adequately respond to ESG broaden their partnership opportunities across the value chain as their ESG policies are assessed for due diligence. Regulators require climate-related risks to be embedded within risk management frameworks, along with the U.S. Securities and Exchange Commission (SEC) rule-making and enforcement expected around human capital and climate-related disclosures and the new New York Department of Financial Services (NYDFS) climate-related supervisory expectations of regulated insurers.
There is a growing demand for ESG-compliant insurance products, investments and related disclosures that goes beyond investment-linked products. There are inherent risks related to pricing impact due to material exposure through underwriting, issues of data availability and quality, higher fees for ESG-friendly investments by asset managers and tail volatility due to governmental, legislative and regulatory developments.
To help address the ESG investment knowledge gap and better manage risk, Figure 1 provides a high-level “cheat sheet” on commonly used ESG investment terminology for actuaries.
Figure 1: ESG Terminology for Actuaries
|Terminology||Meaning for Actuaries|
|Environmental, social and governance (ESG)||
|Principles for responsible investment (PRI)||
Actuaries can apply their nontraditional data expertise, cross-functional skill set and model development background to contribute to ESG and sustainability efforts. We can innovate and advise within and outside of the insurance industry, and in turn, do our part in creating a more sustainable and resilient society.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Copyright © 2022 by the Society of Actuaries, Schaumburg, Illinois.