In this 3-part series, Craig Hupper, TransRe’s ESG Leader, talks about the Environmental, Social and corporate Governance framework.
Can’t listen now? Read the transcript (edited for brevity and clarity)
What do you think is the lowest hanging fruit to pick when pursuing an ESG agenda?
For a re/insurer the first thing that comes to mind about climate change is how to assess, manage and mitigate the impact on our operations.
What would be a simple win for TransRe?
I hate to say it’s simple and straightforward because the deeper you get the more complicated it is (but) immediate attention is needed on the impact of climate change on wildfire, flood and hurricane perils. We’ve done some work evaluating our wildfire exposure, the impacts of drought and moisture as well as the movement of people and populations in what’s known as the ‘Wildland-urban interface’. We now have a better understanding of wildfire risk exposure in the US (e.g. CA) and other countries (e.g. Australia) which suffered terrible wildfires in the last several years.
Last year BlackRock’s CEO released a letter advocating for pro ESG strategies at the businesses BlackRock invests in. Is TransRe a catalyst for implementing ESG policies? Will TransRe seek to improve the environmental sustainability of all businesses?
This goes to the heart of a number of issues surrounding ESG and some of the controversy about it. Are we doing this because it’s a good thing to do for society (socially responsible) or because it’s beneficial to our organization?
We have a number of motivations for incorporating ESG in our approach and our core function is underwriters. An underwriter needs to be aware of all the factors that affect the risk/underlying exposure (such as climate change and other ESG considerations). An underwriter who does not incorporate those factors into decisions is not really doing a good job. At the same time, those same decisions have societal implications. If we evaluate wildfire risk, and determine rates must rise, we have put a market price on risk, and we ensure that economic decisions include the true cost of risk. Through a long chain, that has implications where we build houses, factories and other forms of economic development. If we charge the appropriate price for risk, perhaps things will be built in areas of lower risk, or to standards (building codes) that protect those assets. That is a virtuous circle when done properly.
So ESG is culturally consistent with reinsurance?
We sell promises for the future, and we must be able to deliver on those later. I think reinsures are cautious. We resist fads and don’t jump into new initiatives with both feet. ESG has other important constituents (including regulators, rating agencies and investors). Nobody likes to be told how to run their own business, but we understand these other constituents are interested in how we operate. The social context of business is changing and ESG is a framework that is becoming increasingly important. We also see ESG as an opportunity to differentiate ourselves, to remain relevant and to develop new business opportunities.
Imagine an anti-ESG competitor. What would be TransRe’s competitive advantage over them?
The opposite of an ESG-strong reinsurer would ignore the factors that affect underwriting. If you think climate change does not affect you, you will ignore it. That’s the ‘E’ in ESG. Any organization that ignores ‘E’ is also ignoring the social impact, the ‘S’, how they impact society more broadly. That differentiates them in the labor market, and affects who they hire and retain. By not being responsive to regulatory and shareholder requirements, such a competitor would have terrible ‘G’ governance practices. Many successful companies have incorporated elements of ESG as they try to do well by doing good. That may also be enlightened self interest, what financial folks call ‘long term greedy’.
So the ‘bad ESG’ company would just be underpricing the risk?
Pricing is a key function of a reinsurer, but it is important to look more broadly at how they operate, and whether they have legitimacy in the marketplace. A company that spends its time arguing with the objections and concerns of regulators and rating agencies will struggle to succeed.
Property cat reinsurance is largely a subscription market. What really differentiates successful reinsurers is not how they price an individual deal but how they assemble their portfolios. Over time this becomes a virtuous cycle and the company is recognized for its financial strength and ability to deliver on its promises and commitments. This attracts customers, allowing the company to pick and choose more effectively compared to a company that doesn’t behave in a responsible long-term manner.
Reputation is important, and customers who like you will give you business?
We pride ourselves in having deep relationships with key customers. We are able to go beyond syndicated treaty relationships to come up with specialized deals. We think that’s an opportunity to differentiate ourselves compared to companies who lack such strong relationships.
Does an ESG strategy deliver other competitive advantages?
I would ensure we incorporate the pressures our clients face, and how they look at their business. Insurers are not immune to ESG factors. They face the same (if not more) pressure by their shareholders, regulators, investors, rating agencies and customers, to make sure they incorporate ESG factors into their operations. They are looking at their partners (us) to do the same.
Insurance agents care about the reputation of the companies they work for…
This is connected to an organization’s brand and identity. That isn’t limited to re/insurers. The phone you own, the car you drive, where you live. These and many other decisions say who you are. Brand, staying power and reputation are absolutely critical to re/insurers’ brand.
Do re/insurers have long term ‘staying power’?
Institutional investors such as BlackRock make the argument that ESG isn’t just a ‘nice’ to have and that it isn’t only about reputation and doing good. They argue (and there is research to support it) that highly rated ESG companies outperform as investments. In other words, ESG is core to the performance of organization, especially during lockdown. The question is whether that has been some sort of some self-selection (since natural resources/commodity/oil companies have both lower ESG scores and lower demand for their products recently).
ESG proponents argue that managers of every company must incorporate ESG as part of their fiduciary obligations to run the company in the interest of shareholders.
Is ESG here to stay?
We draw parallels between ESG today and enterprise risk management 15 years ago. Risk management is a core function for any re/insurer. We assume risks and assemble what we hope is a diversifying portfolio of risk. We’re not trying to eliminate risk; we’re trying to manage it. The discipline of enterprise risk management got a kickstart from rating agencies. They made it an important part of their evaluation. That helped re/insurers dedicate resources to build more complex and comprehensive enterprise risk management programs.
If we look at both the global financial crisis in 2008 and Covid-19 today, very few re/insurers were insolvent, compared to previous crises. I think ERM discipline helped with that. Companies may not have initially wanted to do it because it is disruptive, but they have seen the benefits in terms of staying power, reputation and the ability to deliver on their commitments.
Are portfolio management, risk management, ERM and ESG all good ideas that do the same thing?
I think it is true that ESG is not completely cut from new cloth. These are points of views and frameworks, new ways of looking at old problems. History has seen pressure for companies to incorporate principles we would now call ESG, including Corporate Social Responsibility (CSR), Socially Responsible Investment and the ‘Triple Bottom Line’. During the debate about investing in South Africa during the apartheid era, Leon Sullivan (a Civil Rights leader) developed the ‘Sullivan principles’ for multinationals operating in South Africa. These included equitable promotion opportunities, education training and non-discrimination in the workplace etc. Those are early steps towards the more formal ESG frameworks we see today.
How do we keep party politics out of this debate?
I think the loudest objections tend to come from people who don’t like being told what to do. We live in a complicated world. There are many influences that impinge on businesses’ operational freedom. In recent years we have seen multiple impacts, including Covid-19, #MeToo, #BLM. Companies must operate within the evolving rules of the societies in which they employ, sell and pay taxes.
Listen to Episode 2 as the discussion continues….