If You Want Better Returns From Your Insurance, Take A Look At This Number

The insurance industry has a vital role in maintaining global financial stability. Insurers that manage financial risks for households and businesses are particularly vulnerable to rising ESG risks worldwide.

ESG research on the financial sector is particularly dominant in banking, but the insurance sector has received less academic attention. The insurance sector faces sustainability challenges in terms of both assets and liabilities, making its relationship with ESG factors complex.

In recent years, many global challenges have emerged, including climate change, natural disasters, geopolitical instability, and transformational risks. Hence, businesses are increasingly expected to adopt environmentally and socially responsible policies that are sensitive to these issues. In 2023 alone, the global insurance industry paid out USD 145 billion to cover damage from natural disasters. Other studies have noted that stronger ESG frameworks can significantly reduce gaps in disaster insurance coverage.

Researchers at Marmara University in Turkey looked at the relationship between ESG scores and the performance of insurance companies. They used a 10-year dataset from 2013 to 2022, covering 22 life and 59 non–life insurance companies in various regions worldwide. Insurance performance was assessed through profitability (ROA), expense efficiency (EXP), underwriting risk (LOSS), and the return on investment (ROI).

Higher ESG scores were significantly associated with a higher return on assets, more efficient management of expense and loss ratios, and increases in investment returns. Environmental scores were more influential on returns than social and governance.

Higher ESG performance is also correlated with optimized resource allocation and robust risk management practices, which are crucial for reducing operating costs and minimizing potential losses in both the life and non–life insurance sectors.

Weakness in ESG practices is associated with high bankruptcy risk in the insurance sector, whereas strong governance mechanisms help mitigate these risks.

Most people don’t look at the ESG scores for their insurance companies, but those insurance companies would do well to share that information openly with policy holders. We know that people are now expecting open and transparent communication about sustainability from companies that are invested in.