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WTW Asia's broking head takes on compliance and ESG challenges

Rising inflation and costs of living are impacting brokers across the Asia Pacific region. In this edition of Insurance Business TV, Ben Dunston, WTW’s head of broking and placement in Asia also discusses other issues that insurance brokers across the world are grappling with: ESG (Environmental, Social, and Governance) factors and the increasing raft of compliance obligations. 

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Daniel: [00:00:22] Hello and welcome back to Insurance Business TV. I'm Danny Wood, news editor of Insurance Business Australia. Today we're looking at how rising inflation and costs of living are impacting brokers across the Asia Pacific region. We'll also examine how brokers specifically are dealing with the compliance obligations of ESG, environmental, social and governance factors with their clients. We're joined by Singapore based Ben Dunston, who is head of broking and placement in Asia for WTW Willis Towers Watson. Hi, Ben.

Ben: [00:00:53] Hi. Morning, Danny. 

Daniel: [00:00:55] Good to have you on the show. The news is dominated right now by rising inflation, increasing costs of living. There's a bit of a general sense of economic doom and gloom. How can insurance brokers navigate that with clients who are under these sort of financial pressures? 

Ben: [00:01:12] Yeah. Very topical, Danny. It's a it's an extremely sort of current situation that we have right now. And we're seeing in the recent media that inflation in Singapore is up around five, 6%, 7% in Thailand, with only 2% in the Hong Kong. So it's not the same picture everywhere. However, commodities, building, materials, labor, they've all increased substantially and that means rebuild costs and inventories the transit of goods and plus the manufacturing and replacement of critical items for an engineering project are all now of a much higher value. So in terms of advice to clients, it's important that clients revalue their assets regularly so they're not under-insured. On an out-of-date valuation where the replacement cost has not been considered can lead to an under insurance, which can lead to an averaging down of claim. And that means indemnity could be reduced in proportion to the undervaluation of the asset. Meaning, in simple terms, that the client will get less than the limit that they purchased. The market as a whole is considering this when they review new and renewal business. Questioning the old valuations and the brokers in the market are urging clients in impacted lines of business and industries to stay on top of this by getting regular revaluations prior to approaching the insurance market. So there's less chance of a complicated claim situation. Industry wide inflation seems to be on the market's mind, broadening out from first party to third party exposures, social inflation, driving up awards costs, wages, health care costs, driving up bodily injury claims internally as well. Within the insurance industry, the cost of handling claims is going up year on year, which will probably be felt in 2020. Three's pricing. So reinsurers are looking at all these factors for treaty renewals as well, which then of course impacts the direct, in fact, market next year. 

Daniel: [00:03:19] There's a lot of things they're beaming down on brokers and their clients. And another one you haven't mentioned that we'll talk about now is ESG where you are in Asia? I mean, we're feeling a lot of ESG pressure, compliance issues here in Australia and in other parts of the world. But I mean, what's it like sitting in Singapore looking at ESG? Is that a big factor for you guys there too.

Ben: [00:03:43] Yeah, it is. And the banks and the regulators, the insurers, the corporates, they are taking it seriously. And at least that's the messaging which we're seeing and hearing throughout most industries. The Singapore regulator recently announced some guidelines surrounding disclosure on ESG related investment funds. And again, the government in Singapore looking to partner up on green schemes with insurers as well. Specific to insurers, though, I think we'll see the impact of ESG when those exact ESG goals for that insurer become part of their underwriting fabric. So that will then affect the pricing and affect the available capacity for that risk. Within within insurance, ESG has tended to focus on coal and climate, about the main biting points, which is targeted at only a few industries. And it's the most obvious example of taking ESG on board as you're asking the question is the statements that insurers have made on coal risks most of those aligned with the Paris Accord 2050, Although to be fair to most insurers on this subject, they pulled those deadlines in substantially over the last few years. And that can affect everything from the construction of a coal fired power plant, the operational power element and the movement of coal as a commodity as well. One thing to say, though, the ESG messaging in insurance can often feel aligned to the US or the European priorities as opposed to Asia specifically. And there are dynamics which which need to be understood about the Asian market. Firstly, that Asia has a large number of developing economies dependent on coal power that are now facing a difficult financial and insurance environment, and the transition for them may be tougher than in Europe, for example. Secondly, and more broadly, there's a low number of risk managed accounts. So it's hard to say whether insurers are really driving those ESG goals into corporates. A risk manager would be responsible for bringing a much broader range of issues to the table than, say, a financial director who tends to be more focused on the regulator and what they require. So in terms of getting insurers message out there into the corporates, I think many of the corporates in the region would have recognized and developed their own ESG policies without necessarily the insurance industry prodding them in the right direction. 

Daniel: [00:06:17] Hmm. You've mentioned this. You've in some way answered this question already, but is there a way of talking about the challenges generally that the insurance industry is facing with ESG? I mean, what do you see as the key things there? 

Ben: [00:06:32] Yeah, absolutely. I mean, it's a very fluid situation. And I think that's that's the fundamental part of it. But within ESG. Let's just talk about climate for a second. I mean, it's so fundamental to risk. Extreme weather events, the increase in frequency and severity, those which makes understanding the future loss environment rather difficult. Insurers can look back at one in 250 year event and they can price the probability of a major cat loss and assess the likelihood of of that based on what they know of the past. But do we really understand the scale and scope of the change which is which is coming? Rising sea water, for example, and flooding? It's a known unknown, but it depends on geography to some extent. But what if drought? What if heat waves, large storms, 2021. So the fifth largest loss year on record, $100 billion of insured net cap losses, which is the fourth most costly year. So looking again at slightly broader range there, look at the Ukraine, the conflict that's going on there. We now know that in the Ukraine they produce 20% of the world's high grade wheat and about 40% of the world's sunflower oil. An area event related to climate change in an agriculturally important area such as Ukraine can lead to food shortages globally, which can drive inflation, and that can lead to serious social unrest. I mean, that's the interconnectivity of the world. So within insurance, I think insurers will be looking at these things, looking at these macro factors and these developments with some trepidation, and they'll be questioning whether they really have a good grasp on on what the current situation is, but also how they shape for the future. Remember that the climate element is just one part of ESG, but it also doubles up with other thematic areas like inflation causing the claims quantum to increase and then look at social inflation causing litigation loads to increase. So for insurers, I think a good medium to long term initiative would be establishing a consistent measure of underwriting information on ESG, whether that's using an industry agreed index or the industry agreeing to a standardized exposure report so that so that clients in high risk industries can can assess, can be assessed on an equal basis. I think there is some encouraging signs, though. There are some more proactive insurers out there looking to be on the front foot on the issue. QBE being one with the premium for good campaign and then Beazley worth mentioning, they created a consortium in Lloyd's of London which offers capacity to those clients with agreed and ESG goals. So so there is movement there. I think the insurance industry is really is galvanizing. It's just not exactly sure which way to go, given the sort of the width of the space that they're trying to operate in right now. 

Daniel: [00:09:41] I mean, given the width of that space, you've mentioned a few big names there, but looking back at Asia where you are, are those names going to be able to drag the rest of the insurers with them? I mean, do you see where does where a sort of Asian insurers specifically positioned in terms of moving towards adopting what you describe as sort of some, I guess, general guidelines, at least for ESG, that everybody can apply? 

Ben: [00:10:07] Yeah, I think the international is certainly going to be leading that space. And we talked earlier about the message coming from a central point. I think some of that is is quite sensible. It needs to be coordinated message for that, ensure it across all its geographical entities. Just for consistency sake and I think the message is driving out of there. I couldn't comment exactly how that's dropping into the or the carriers here in Asia. Certainly on issues like coal which we talked about, that's the most obvious one. We definitely seeing that being adopted across a range of insurers and it appearing quite high on their priorities list. I think one of the one of the issues really is that it's such a broad space and we talk about ESG, but the S part of it really is very, very broad indeed. And it can soak up areas such as animal testing, child labor. All of these have been priorities for insurers, but but different insurance. So it's going to be a movable space. They're going to develop policy as as they go, and it will be dependent on what the parent company sees as being their individual priorities in that space. 

Daniel: [00:11:21] So, Ben, what role do you see insurers in the Asia region playing to reduce climate risk? Well.

Ben: [00:11:30] These issues are never solved well in isolation. There's huge themes and working together in value chain ecosystems alongside, say, analytics companies, valuation companies, engineers and public entities as well, such as regulators. It seems to make sense, and the insurance community can help by building risk and analytical tools specific to the client in that client and their industry that quantifying and qualify those exposures, which in turn helps to build climate resilience as well. I mean, understanding exposures now and in the future is a first step towards the decision of risk transfer versus risk tolerance in terms of risk transfer. There are parametric solutions where insurers, brokers, public entities have come together to provide disaster relief solutions for impacted areas such as the agricultural provinces of the Philippines. But most of the most of the insurer action, honestly, is around. Climate risk seems to be around risk avoidance as opposed to risk reward. Insurers are reducing exposures in line with the Paris Accord, but there are sort of green shoots of hope about how the insurance industry is coming together, those external partners, to provide a much better solution for the industry, a wider solution with more with with more understanding of how the clients wish to accept or move their own risk. So there's definitely a role for the insurance industry to play to improve the understanding through analytics and to qualify and say quantify those exposures and to be part of the tide that's rising all ships on in this space.

Daniel: [00:13:20] I wonder if the pressures bearing down on them in some way is the risk of greenwashing and getting caught up in that. I mean, what can brokers and insurers do do about that to sort of make sure their clients aren't at risk of, I guess, not walking the walk and just talking the talk? 

Ben: [00:13:41] Yeah, well, financial regulators obviously been looking at this area recently developing policy in it. And there is a lot of scrutiny, I think, on greenwashing in the investment industry, particularly around those ESG related investments, making sure there's no misleading claims of sustainability in those portfolios. Having a clear regulatory standards is the first step independently of the insurance industry. Having the regulatory standards in place is the first step to making sure that the sort of green accreditation is is one that's valid. And I think that's important that that takes place. First an example of that, again, we mentioned the monetary authority of Singapore, the regulator here. They introduced new standards in this area. You know, corporate social responsibility. It's not a new concept. A lot of insurers and other companies have been releasing those statements within their annual general meetings for some time now. But there's definitely a renewed focus in this space, mainly because ESG and the S part of it is now so much more prevalent and gets a lot of stakeholders from very broad range of stakeholders interested in what the companies are doing. So. So. In terms of advising clients. I think that was the question at the very start. From an insurance perspective, the significant increase in greenwashing allegations mean that the directors and officers, policyholders, they're increasingly exposed to lawsuits by shareholders or activist groups alleging misrepresentation. And it's reasonable to assume, therefore, in reaction to that, that the insurers will be more cautious when they're writing down policies, notably around ESG disclosure.

Daniel: [00:15:30] Ben Dunston, thanks very much for your time on insurance business TV. 

Ben: [00:15:34] It's an absolute pleasure. Thanks so much for having me, Danny. 

Daniel: [00:15:37] And Ben Dunston was in Singapore and he's head of broking and placement in Asia for WTW. You've been watching insurance business TV bye for now.