Premiums 4 Good: redefining the role of insurance in society
By Tom Herbstein and Andrew Voysey
21 Feburary 2017
Australian insurer and member of the Lloyds market, QBE, recently launched a new initiative that attempts to realign the interests of its customers with its investment practices. If successful, it could represent a defining moment in the role of insurance in society.
‘Premiums 4 Good’ (P4G) allows QBE’s clients to mandate the insurer to invest up to 25 per cent of their insurance premiums into socially responsible investments – predominantly green and social impact bonds at present. The initiative is optional, with QBE providing transparent reporting to highlight how investments are made and projects benefited. It offers no additional risk to QBE’s clients (mainly corporates), yet allows them to include the investments within their own analysis of their impact on society. P4G seemingly offers the client a win-win and, from a QBE perspective, some exciting commercial and strategic opportunities.
The context is important. QBE launched P4G amidst a series of ongoing global corporate scandals that continue to undermine levels of trust between society and big business. The political implications of the resulting public discontent led Australian prime minister Malcom Turnbull to challenge his G20 peers to “civilise capitalism” at their recent summit in China.
As part of the financial services sector, insurers are not immune from these challenges. If anything, the low levels of public understanding of how insurance works means that, as an industry, insurers face an even more urgent need to connect better with the needs of their clients. At the same time, the climate-risk protection gap – growing exposure to climate risk versus an overall decline in insurance penetration – is continuing to threaten the relevance insurance plays as society’s risk manager.
Now a concern firmly on the boardroom table, there is growing consensus that the financial services sector needs to find ways to redirect capital flows into investments that can support the transition to a zero carbon, climate-resilient economy. As the third largest type of institutional investor, and being so impacted by climate risk, insurers are regarded as a key player in this respect.
However, a recent study called ‘Investing for Resilience’ by ClimateWise – an industry leadership platform facilitated by the Cambridge Institute for Sustainability Leadership (CISL), of which QBE is a member – highlighted how insurers are not ‘natural’ investors in resilience. This is, in part, due to a mix of regulatory pressures, short-termism and the need for insurers to maintain risk diversification between their underwriting and investment portfolios. One of the biggest challenges is that the majority of the insurance industry’s invested assets are client funds (ie premia), rather than company profits. This means insurers’ primary concern is ensuring they have sufficient access to funds from invested premia to be able to pay claims as they arise, rather than leverage any other systemic benefits their investment activities may produce.
P4G is an attempt by QBE to tackle some of these challenges head-on by inviting their clients more directly into the decision-making process around what impact they would like their invested premia to have. Crucially, it is an attempt to get a clear mandate from the client that invested assets can, and should, be used to fund societal benefits, on top of generating sufficient financial returns.
From a QBE perspective, the benefits of P4G are clear. It offers a way to differentiate itself and add value to client relationships in ongoing soft market conditions. Customers get greater say over where their funds are invested (a complete novelty) and can include the impact of their invested premia in their assessments of their own wider contribution to society’s goals. As P4G helps to build better and more transparent relationships with its clients, this should resonate well with policymakers and regulators, highlighting the company’s intent to tackle the ongoing trust issues head on. Lastly, and possibly most excitingly, P4G provides a potential opportunity for QBE to respond to some of the macro risks impacting society and, by default, the insurance sector, and this could be used in the future to target systemic risks, such as those arising from climate change.
Nevertheless, P4G faces its challenges. First, a lack of viable investment opportunities at scale means that considerable market growth, in suitable investment instruments, is required. These will need to accommodate the fact that insurers’ investments must generate sufficient financial returns, with strict liquidity requirements, to pay claims. The second is how to maximise the potential of P4G to tackle risks that are having a systemic impact on the underwriting side of the insurance business, such as investments that can help to enhance climate resilience.
Regardless, the attempt by QBE to redefine their relationship with their customers through P4G makes it a significant and exciting innovation. Considering QBE alone invests US$26 billion of premia, even a small proportion of this redirected into socially or environmentally beneficial investments could have a sizeable impact. Yet multiply this out across the $35 trillion of global insurer assets and you can see the impact this initiative could have if industry-wide scale can be achieved. This accounts for why Gary Brader, QBE’s Group Chief Investment Officer, notes that, “we sense a strong momentum building across both issuers and investors to work together to create more investable product that ticks the necessary risk and return boxes, whilst at the same time delivering an additional social or environmental objective, and we are keen participants in such discussions”.
Mr Brader is certainly not alone. Indeed, CISL has been working for the last three years with a group of institutional investors under the banner of the Investment Leaders Group. One particular project has been to develop a set of six simple, yet scientifically robust, impact metrics that would allow professional investors to tell their clients what impact their investments have had against the UN’s Sustainable Development Goals. Interest from the market has been significant.
In conclusion, P4G provides an exciting example of an insurance company innovating ways to achieve a greater societal impact, via its investment activities, by integrating the client directly into the process. Ultimately the success of P4G will depend not just on client uptake, but also on uptake by the broader insurance sector and the ability of insurers to align such investments with solutions to the challenges they face on the underwriting side of the business. This will require a shift in the way the industry approaches managing societal risk and resilience, how the regulatory environment enables the growth of such investments and whether enough investment opportunities can be created. These are exciting times.