ESG ratings a driver of higher underwriting performance: Howden & Fidelis study

According to international broking group Howden and specialty insurance and reinsurance firm Fidelis, underwriting for higher ESG rated counterparties tends to lead to better underwriting performance.

The two companies studied the loss ratios of 30,000 policies from Howden and Fidelis’ datasets, making up a premium value of around US $9 billion, against third party ESG ratings.

It is the largest study of its kind, that has attempted to establish the link between these factors.

The study found that environmental ratings have the strongest correlation with loss ratios, but there is variation by line of business and industry, with property insurance showing the strongest correlation between higher ESG scores and improved loss experience.

These are telling findings and will be of great interest to those in the insurance-linked securities (ILS) community that are working on initiatives in the environmental, social and governance (ESG) space.

As ILS fund managers look to adopt ESG policies, while catastrophe bond and reinsurance investors demand greater ESG disclosure, the potential for this to be a driver of improved returns will be welcomed by all sides.

In addition, counterparties and cedents will be hoping that a greater degree of ESG disclosure and ratings could result in more favourable underwriting returns, especially if they can evidence that the performance of their contracts are better than those lacking ESG disclosure or ratings.

Howden and Fidelis said that they will now work together to further explore the underlying causation of this, in order to enhance understanding and usability, as the pair seek to further the industry’s adoption of ESG metrics and work towards supporting sustainability.

David Howden, CEO, Howden Group Holdings commented, “It’s great to see the proactive approach that Fidelis and other insurers are taking to better understand the link between ESG profiles and risk. The data backs up our long-held belief that clients should be rewarded for high ESG credentials.

“This is an obvious way in which the insurance industry can support the transition. I hope to see, in the near future, ESG factors built in to underwriting processes and pricing decisions to a much greater degree.”

Richard Brindle, Chairman & Group Chief Executive Officer and Chief Underwriting Officer of Fidelis added, “This is a great example of the right thing to do also being the most profitable thing to do. Being able to articulate this link will become increasingly important to our interactions with key stakeholders, not least the investment community.”

ESG investing and the opportunities it presents are a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.