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AGCS research study: “The predictive power of ESG for insurance”

  • AGCS and The Value Group, supported by academia, undertakes pioneering research on the relevance of ESG for industrial insurance

  • The study establishes the argument for the integration of ESG into risk analysis

  • The research identifies ESG parameters which can help predict risk events before they occur

Identifying, understanding and managing risks are at the core of the insurance industry. All risks have various dimensions, but the environmental, social and governance (ESG) profile of a risk is a dimension that has only recently found its way into risk analysis in the industrial insurance segment.

Compared with other types of perils, such as financial risks, the understanding of the relevance of ESG issues and their practical application for insurance is still in its infancy. To bridge this gap, Allianz Global Corporate & Specialty (AGCS), together with The Value Group, a Munich-based research and investment consultancy, initiated a research project to assess the relevance of ESG for industrial insurance. The project is supported by Prof. Dr. Klaus Röder, Chair of Financial Services from the University of Regensburg and  Prof. Dr. Rudi Zagst, Chair of Financial Mathematics from the Technical University of Munich.

“It is the first time, that research provides evidence of the relevance of ESG information for industrial insurance, helping to identify companies that have a better risk management performance than their peers”, says Michael Bruch, Head of Emerging Trends and ESG, AGCS. “Not surprisingly, the better a company’s’ ESG performance is, the lower the probability of it experiencing incidents such as workforce-related accidents, being involved in reputation-damaging controversies or being fined by regulators or government bodies.”

Break-out box: In addition to issuing financial ratings, rating agencies gather and structure environmental, social and governance data and the performance of thousands of companies globally. ESG ratings provide transparency about the environmental, social and governance risks of the companies analyzed.

ESG parameters have significant predictive power to identify whether companies are exposed to more risks than their industry peers. Several scenarios, ranging from workforce risks, such as non-compliance with safety laws, to sector-specific controversies reported in major media are analyzed as part of the research and significant correlations identified. The research reveals, the better a company’s ESG performance the less likely it is to experience events that may result in a financial loss for the company.

“The central goal of the research was to identify early warning indicators, or so-called predictors. ESG indicators have significant explanatory power to indicate whether a company has a higher probability for experiencing future harmful events,” Dr. Claus Dürndorfer, Managing Partner and Founder of The Value Group explains. Predictors help to spot a deteriorating situation before an event happens and can help companies understand whether they have appropriate measures in place to reduce the risk of reoccurring harmful events.

Break-out box: The study is based on a wide range of data sets from The Value Group’s database, encompassing data from more than 6,000 global companies over 12 years.  To capture the dimensions of insurance-related  risks, various new parameters were developed for this study.

An example of a predictor that the study identifies is the Workforce Health & Safety (WH&S) score of a company, a sub-indicator
of the “Social” risk dimension. Health and safety trainings, employee wellbeing and investments in employee safety, which , together with other factors, are captured by the WH&S score, have measurable and positive effects on employee accident and fatality levels. The WH&S score is the best indicator to understand the risk of future accidents and fatalities. A historic accident rate might still be indicative of an elevated accident rate in the future, but for fatalities this argument is not true. Fatalities are mostly one-off catastrophes that are rarely repeated in following years. This makes fatalities far less predictable. Therefore, the WH&S score of a company has a significantly higher predictive power than that of previous years’ fatality rates.

In addition to workforce risks, other relevant predictive ESG parameters have been identified in the following research areas.

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Harmful events cannot only be predicted by classical ESG parameters such as workforce or environmental parameters. The Value Group’s quality rating, another aggregate parameter, measures the competitiveness of a company and includes financial KPIs such as profitability, debt ratios, brand value and innovation. Declining competitiveness, or the financial struggles of a company resulting in cutbacks on safety programs, for example, are frequent reasons for the occurrence of loss events.

“The benefits of ESG analysis for investors are widely acknowledged and sustainable investing approaches are widespread”, says Isabel Bodlak-Karg, Manager ESG Business Services at AGCS. “This research aims to take a first step towards developing quantitative evidence for the significance of ESG for the insurance industry. This study establishes the argument for the integration of ESG into property and casualty insurance risk analysis.”

AGCS has in-depth expertise in the area of ESG and offers consulting services for clients to identify and assess material environmental, social and governance risks. We are dedicated to delivering individual solutions to the management, control and reduction of ESG risks. Our consulting team is available at AgcsSustainability@allianz.com.

For more information, see the following document.