00:01
Emma Harper: The insurance industry is at a turning point. In an era where climate change and environmental responsibility are at the forefront of global conversations, the insurance industry is taking center stage. Insurance is all about risk, the assessment of risk, the proper pricing of risk and the ongoing management of that risk. And on the other side of the ledger, investing assets appropriately versus that risk. So, there's really no industry better suited to adopt the basic principles of sustainability and responsible investing. Incorporating sustainability factors into the underwriting process and the management of investment assets not only bolsters risk mitigation efforts, but also promotes environmental stewardship, social responsibility, and more robust enterprise risk management practices. Welcome to “Insuring Tomorrow,” a series of podcasts where we take a deeper dive into the world of insurance and evolving trends in sustainability. I'm Emma Harper. I research sustainable companies that Sage Advisory. Sage is based in Austin, and as of this recording, manages over $24 billion in assets. Today, we're talking with Greg Cobb, who leads the insurance solutions practice at Sage.
01:06
Greg Cobb: In terms of the role of insurance at Sage — I mean, we've actually been managing insurance company assets since day one back in 1996. So, it's actually very much a part of our DNA for the last 27 years here in Austin. And when we think of Austin, I think most people have heard the catchphrase “Keep Austin Weird.” So, I guess you can say that we've been keeping it weird baby and making insurance fun for over 27 years. And it just keeps getting better. Because today, the insurance industry actually represents our largest corporate line of business, we have over 58 relationships, and 110 distinct portfolios. And we're operating or engaged with 22 domiciles, both offshore and onshore. And when you look at the breakdown with respect to industry types within the industry, a little over 5% is life and health, roughly 60% is property and casualty. And the balance is in the wonderful world of ART, the world of alternative risk transfer. And here we're talking about the captive space, whether it be single parent, pure captive, segregated sales associations, or even risk retention groups. So, it's well diversified across the industry. And we are fully engaged with the industry. And that includes engagement with associations, regulators, rating agencies, and service providers across the industry.
02:25
Emma Harper: So, a lot going on with insurance at Sage.
Greg Cobb: It’s never a dull moment.
Emma Harper: Absolutely. So, with so many audiences ESG and sustainability can sometimes be a touchier subject. And you know, what are some of the observations or takeaways from these engagements with the industry in these forums that you're talking to?
02:42
Greg Cobb: Okay, so it has been a broad range of audiences, as we talked about. But more recently, we spoke at NRRA, which is the National Risk Retention Association, where the theme there for that conference was innovating and advocating. And you can look at ESG and the responses that we've gotten from the industry through that particular lens, if you will. And so as industry participants see it, ESG is not really innovative anymore, because it's been around for a while. And advocacy is a little suspect. And so ESG has been around for a while, but it's still not easy to spell, it's still not as easy as ABC, right. And the primary reason for that, again, this is coming from the insurance industry that we've talked to, it's acronym hell. You have the PRI, the CSR, the IASB, which is now the ISSB, the TBFD, the TCFD, SDG, IFSR. And with all of that, the perception is that there are you know, these are well meaning organizations. But at the same time, they're self-serving organizations that are creating their own vernacular, their own ecosystem, their own world, and it's confusing. It's intimidating. And I will say as a practitioner, sometimes it is very annoying. And in the end, the industry or ESG within the industry is suffering from toxic label syndrome, which is really bad marketing, because that gives rise to phrases such as “go woke, go broke,” right, which is actually it's pretty catchy. And it's pretty funny.
Emma Harper: It is pretty catchy.
Greg Cobb: And it's really good marketing, it’s genius, but at the same time, it is intellectually vacuous. In other words, it's just stupid. And then you have another divide that the insurance industry sees and that's the red versus the blue. So, on one side, you have the blue with their ethereal utopia, which is never, ever going to happen – ever. But then on the other side, you have the red that denies everything and advocates nothing. And what you have between the red and the blue for the insurance industry is this big purple pool of risk. And that risk, that pool of risk, needs to be priced appropriately. Now ESG is not the end all be all, it's not the answer. But it's an additional and valuable tool or element in terms of pricing the risk; how do you navigate these divides, and they're pretty wide. But if you really cut through all the noise, and all the BS, if you will, ESG is really accessible and should be very straightforward to the insurance industry because it is a risk driven agenda. In the end, what is it, you incorporate environmental, social, and governance factors into the analysis, selection and management of risk. That sounds a lot like the other side of the balance sheet for insurance companies, the underwriting and liability risk. So, both sides of the balance sheet need to talk to each other, a more holistic approach, and that factors into better enterprise risk management or ERM.
05:51
Emma Harper: So really, what you're saying is it makes sense for insurance to be looking at this. I mean, they've been looking at it on the underwriting side, they should be looking at it on the investment side. It should be an overall approach for the insurance companies. So, what are insurance companies doing right now? You seem to be saying that the US industry is confused, uncertain, lagging as to the adoption and integration of ESG and sustainability?
06:12
Greg Cobb: Yeah, I think relative to the rest of the world, lagging is the key issue here. And there are a couple ways to look at that. I mean, you can look at the signatories to the PRI, or the Principles for Responsible Investing. And there are over 5,300 signatories worldwide. So, 5,300, worldwide, a little over 1,000 in the United States. And with respect to insurance companies at the general account level in the United States, only 10. So that is 1%. I would consider that lagging, but on the bright side, and that's the general account on the bright side, many of their investment management subsidiaries have signed on to the PRI. But again, at the general account level, it's lagging considerably, in contrast to what you would see in the APEC regions, and in particular, in Europe. And there's another organization, the PSI, which is the UN's Principles for Sustainable Insurance. And this is actually a little bit more of an aspirational organization, they're just looking to provide a framework for the evaluation and management of ESG risk across the value chain within the insurance industry. Now there, there are 159 signatories worldwide. And that's a third of the world's premiums. So that is substantial; there are 106 supporting institutions. But with respect to the signatories, in the United States, there are only three. And that's Marsh, Farmers, and AMS the insurance credit rating agency. So that's a positive step. So, there's a lot of work to do and a lot of opportunity in terms of catching up with the with the rest of the world.
07:50
Emma Harper: So we do seem to be lagging, but making progress. What about the direct financial and investment benefits?
07:57
Greg Cobb: Well, that's a podcast in and of its own right. But broadly speaking, and in summary, I mean, the hard evidence for financial and investment benefits, it really continues to mount over time. And whether you're looking at broad macro meta studies, you're looking at enterprise propositions from risk managers, or longer term or granular investment studies, the weight of evidence is becoming more skewed to the positive. And over time, as we have better understanding, greater adoption, greater standardization, better metrics, and more studies, the benefits, both financial and investment, should become more apparent to the overall industry.
08:34
Emma Harper: So how do you move the needle in the insurance industry? Every industry has a fairly unique set of stakeholders. What does that look like for the insurance industry?
08:43
Greg Cobb: Yeah, the stakeholders they can be pretty pesky critters. But if the financial investment benefits don't motivate you, the stakeholders just might do the trick, because in the insurance industry there are many stakeholders and they are very motivated. I mean, first you have the shareholders at stock companies and you have the policyholders at mutual companies. And they continue to put forward fairly aggressively ESG related initiatives to senior management. And then you have company employees. You know, within the insurance industry, gender equality has taken center stage as well as DEI more broadly. All you have to do is look at the NAIC’s Working Group on DEI. And then there are your prospective employees, you know, the next gen cares deeply about ESG. And that's your hiring base on a go forward basis. And then the third stakeholder, or you can look at community relations, if you will here, and talking about media scrutiny and reputational risk. But then there are the key stakeholder, the consumers, right people that help drive the profitability. So, you know, no one likes to pay their insurance premium, right? It's just a cost. There's no immediate benefit. So, consumers are going to shop policies, they're prone to shop stories, you know, we're all human right? So just give them a good story. So, if you focus on the “E” in ESG you pay the premium, you get a policy, and you save a penguin. Who doesn't love penguins? I mean policies and penguins, baby, it's an easy sell. This is not hard for the insurance industry in terms of branding and distribution. And as a side note, you know, over the next five years, 75% of the workforce is going to be millennials. And you need to factor that into your consumer and your employee base. But beyond the direct stakeholders, management in the insurance industry is painfully aware of third-party assessments. And here we're talking about the regulators, the rating agencies, the reinsurers, risk managers, and peer groups. And you know, all of these stakeholders and interested third parties are driving the demand for even partial adoption across the value chain. And it's actually, you know, it's working again, maybe quietly, because AM Best recently came out with a report that suggested 40% to 50% of insurance companies have already integrated ESG applications at some level in response to stakeholder demands. And they also suggest that that demand continues to increase, despite all the noise that we've been talking about, all the divides that we were talking about earlier. And I mean, I would emphasize quietly in many cases, and I'll give a real world example. We spoke at the Insurance Council of Texas, which is the property and casualty association here in Texas. And in Texas, I think most people know ESG is persona non grata; we still spoke. And, you know, we asked the question, like, Oh, God, what's the audience going to be like? And the response was, Well, you know, they're probably going to be a little more responsive and amenable to what you're saying, but they're just not going to raise their hand. So, it's sort of a quiet integration, and you just don't talk about a lot.
11:46
Emma Harper: So, what about the other major players in the industry and their views towards ESG and sustainability? Here, I'm referring to rating agencies, regulators and, say, reinsurers.
11:57
Greg Cobb: Across all the players that you just mentioned, there is more buy-in than you might expect. We expect it in Europe, we expect it in the APAC regions, but even more buy in here in the United States. You know, the first one you mentioned, with respect to the rating agencies here in the United States, you know, Moody's, S&P, and Fitch are all signatories to the PRI, and AM Best for the insurance industry specifically is the supporting institution of the Principles for Sustainable Insurance, the PSI. So, all have incorporated ESG factors into the determination of credit risk. And it gets back to the fact that the insurance industry does see ESG as a risk driven agenda or risk management issue. So, there was a clear and definite push there. With respect to the regulators. There's not a single global mandate yet, but they are grinding through it. And they really, really do want you to think about it, they are taking steps to make you think about it, all you have to do is look at the FDIC and their climate risk disclosure survey, which has now been adopted by 14 domiciles or states, including the District of Columbia. You can look at the see the SIF or the Sustainable Insurance Forum. This has been done in conjunction with the UN. And it's made up of global supervisors and regulators. And somewhat redundant maybe to a degree is the IAIS. Remember that acronym hell I mentioned earlier?
Emma Harper: Yes, I do.
Greg Cobb: It’s just the gift that keeps on giving. So you have the IAIS, or the International Association of Insurance Supervisors. And this is a voluntary organization. So again, no mandate. I mean, it's made up of regulators only and 200 jurisdictions across the globe, and that covers 90% of the world’s premiums. So, you can see how the trickle-down effect might work with this. And here domestically, you have the California Department of Insurance with its roadmap for sustainable insurance. It's kind of a manual on the climate related side. It's a little heavy handed, but it's a very useful document, but the document, it's also gives an idea of what's to come. And then you have the New York Department of Financial Services, which has broadened out their climate related reporting requirements to all insurance companies in New York, not just those with premiums greater than $100 million. And then you look at some of the islands, Bermuda in 2019 had its ESG Stock Exchange initiative. And they now have a jurisdictional initiative. And they're very serious about this. They want to become the climate finance capital of the world. So just do the math on that one. Right. And then you have Guernsey, the Isle of Guernsey, which has an ESG accreditation for risk bearing entities in their particular domicile. So, you know, the waves are building and this way from the regulators is pretty hard to stop. And then you mentioned, oh, you mentioned the reinsurance. You mentioned the reinsurance and the risk managers. Okay, these are the people that really, really understand risk on a global scale. They know how to price risk well, and they are fully engaged with ESG and sustainable practice practices across the entire value chain or the ecosystem, from underwriting, to distribution to claims to investments.
15:05
Emma Harper: That's something we definitely see when we're looking at reinsurers from an ESG perspective and analyzing them on our end, is they’re at the top of the heap there. They're always at the top of the peer group in terms of their practices.
15:17
Greg Cobb: Yes. You don't mess with the alpha guys.
15:22
Emma Harper: So, can you give some concrete examples?
15:27
Greg Cobb: Sure. Let's see. Zurich Re out of Europe. They're actually incorporating ESG standards into their code of conduct for service providers and consultants. And you have to attest to it and sign it on an annual basis. So, it's only a matter of time before that creeps into the policyholder, because with respect to the policyholders, it's not only underwriting risk to Zurich, but also reputational risk to Zurich Re, and across the reinsurance base reputation is everything. And then you have let's say Marsh. Marsh has come up with an 18-point algorithm for basically evaluating ESG exposures across the across the enterprise, and how much risk you actually do pose from an ESG standpoint. And then you have Aon, which is taking the Principles for Sustainable Insurance, and they are embedding those into the captive framework in support of the parent, or in support of an enterprise-wide objective. So, across the reinsurance space and the risk manager space, they've been beating the drum for quite some time now. And now it's just getting a little bit louder.
16:44
Emma Harper: So, what are some of the first steps for an insurance company and moving towards even a partial adoption or integration of ESG?
16:53
Greg Cobb: It's a little loosey goosey, if you will, because there is no manual. There's no mandated approach, if you will. So, it's pretty wide open. But you know, there are always some fairly broad brushes. The first step, I think is just determining how you approach ESG at the enterprise level. And that's going to start at the board level, with respect to incorporating it into the mission statement, incorporating into the culture of risk. And then finally determining what is actually practical in terms of application. So, the board, it's really up to the board to convey to everyone in the organization across the value chain, that this is a highly purposeful initiative. That's key. The second stage is really just building awareness and education across that value chain at each stage of the value chain. And the third step is incorporating measures even at the margin, just the margin, just moving the needle a little bit. And again, it gets back to there's no one way to do it. There's no directive, it's going to be a function, again, of the mission statement, the culture of risk, and what is practical, and in the end, affordable for each insurance company.
18:02
Emma Harper: Absolutely. You know, I think that that idea of practicality is something that we look at here at Sage as well in our practice, and the way that we look at risk and ESG assessment, when we're trying to analyze different companies from this perspective is it has to be practical in nature, it has to be pragmatic. We're not looking for, as you were saying at the top, ethereal focus on ESG. We're looking for practical, pragmatic, financially material.
18:28
Greg Cobb: You know, and along those lines, Ceres came out with a with a survey of the insurance industry, and they essentially looked at the woke of the woke, if you will, within the insurance industry. And they plotted the woke of the woke versus the UN's SDGs, or Sustainable Development Goals. And as you all know, there are 17 of those goals. So, you would think that the woke of the world right, will be engaged in all 17. But when you look across that spreadsheet or that table, if you will, what you will find is that the only SDG is the climate related –
Emma Harper: SDG 13.
Greg Cobb: That's the only SDG that everyone is aligned with. And then it's pretty much all over the map. So, you'll have companies that they're focusing on maybe six of the SDG, or four of the SDGs or five of the SDGs. So again, why are they doing that? Because those 4,6,9 or 10, if you will, are consistent with our mission statement. They're consistent with our culture of risk, and they're practical to their business and affordable. So again, that gets back to there's no mandate. It is what you want it to be.
19:46
Emma Harper: So, Greg, as you're talking you seem to be throwing a lot of “R” words out there, so regulators reinsurers, rating agencies, in the insurance industry.
19:56
Greg Cobb: That's actually you know, Emma, pretty funny. Cause earlier, we were talking about how spelling ESG is not as easy as ABC. And I think you've just pointed out that it's actually easier than that. Because you know ESG in the end can be spelled for the insurance industry, can be spelled with a big fat capital “R,” right to your point, risk reduction, reward enhancement, rating agency buy-in, regulatory scrutiny, reinsurer alignment, risk manager awareness. And if you ignore all of that, you're going to subject yourself to significant reputational risk. And even with that, there's more little R's along the way. You have risk to your hiring practices, risk to your distribution, and risk to your tower and panel of reinsurer. So, in the end, it might be a really good idea for everybody to learn how to spell “R.”
20:51
Emma Harper: So yeah, you’re basically saying everything sums up to the insurance industry to a lot of Rs. And that's the only acronym they really need to understand here is the big Rs.
20:59
Greg Cobb: The big Rs. It's really, really easy.
21:03
Emma Harper: I like that. I do like it, it's catchy. So, when you put it all together, there seems to be a lot of wins. It really sounds like a win-win for the insurance industry.
21:13
Greg Cobb: Yeah, but the question is, the real question is, how many wins in a win-win, right. And at Sage, we count 10 with respect to even partial integration, partial adoption. Number one, you're gonna have a more defined culture of risk, stronger corporate governance, more robust ERM practices, you're going to reduce your potential reputational risk, you will be able to experience differentiating branding and marketing benefits, you're going to get out in front of the regulators, you're going to get out in front of the rating agencies, greater align with your reinsures. And you're going to have better opportunities for risk adjusted returns. And if you move the needle just a little bit, the most important number 10 – you never have to sit through another ESG session or podcast, even at the margin, even at the margin. But all that being said, I mean, I think we’re leaving somebody out; on top of it all, you might save a penguin. And what could be better than saving a penguin?
Emma Harper: Well, thank you for your time today. It was really great to talk to you about the insurance industry and where we're at.
Greg Cobb: Thanks, Emma. I look forward to talking to you on the next podcast.
Emma Harper: Sounds great.
22:26
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