ESG Ratings Are Business Insurance’s New, Contested Frontier

Large insurance brokers are dabbling in measuring corporate policyholders’ environmental, social and governance performance, hoping to generate business with possibly more competitive pricing.

Marsh & McLennan Co. and Willis Towers Watson plc (WTW)—which act as intermediaries between insurance underwriters or carriers and their customers—have begun assigning their own ESG scores to corporate clients that are seeking to lower their directors & officers (D&O) insurance premiums.

The brokers’ efforts are nascent, and no data exist on whether companies are getting premium discounts for having nabbed positive ESG scores. And plenty of skeptics shrug off the idea that brokers’ scores will be more than just a marketing gimmick.

But the brokers’ efforts show the extent of ESG’s reach into all aspects of corporate risk management and whether the trendy governance topic can be used to extract some savings on expensive D&O policies.

More companies are voluntarily disclosing their ESG obligations and initiatives in investor filings. But the insurance industry’s interest in ESG also comes amid the backdrop of the Securities and Exchange Commission’s current proposed rulemaking on requiring companies to more fully disclose their climate change risk.

“The ESG ratings is a step in the evolution of trying to come up with a better understanding of how ESG affects D&O risk,” said Kevin M. LaCroix, an insurance lawyer and vice president at broker RT ProExec. “And I think that question still stands.”

Scoring Customers

Marsh and WTW’s ESG performance rating tools seek to measure how companies broadly fare in curbing carbon footprints, promoting diversity in leadership and workforce, and strong corporate governance.

Introduced late last year, Marsh’s ESG analytic tools grade a company under 18 categories based on the World Economic Forum’s ESG metrics, including air pollution and social services. The program contains 169 self-assessment questions for companies that are looking to buy insurance from carriers through Marsh. Once the answers are filled out, Marsh uses them to issue scores to companies. Marsh’s plan is to submit these scores to insurance carriers, in hopes that high scores would convince carriers to lower premiums.

Marsh also encourages their corporate clients to get their ESG disclosures vetted by the law firms that are on Marsh’s list of approved firms. These firms include Norton Rose Fulbright and Orrick Herrington & Sutcliffe LLP.

Some of the largest insurance carriers—including American International Group Inc., Berkshire Hathaway, Zurich Insurance Group, Axis Capital, and The Hartford Financial Services Group—agreed to consider offering lower deductibles and more coverage if companies earn good ESG scores from Marsh and have their ESG disclosures vetted, Marsh said last year in a press release.

WTW’s ESG score measures 11 different categories, ranging from board diversity, supply chain management, worker satisfaction, and executive compensation, according to Jonathan Weatherly, a senior director at WTW who helped launch the broker’s ESG tools.

“ESG scores can give D&O underwriters an illusion of precision when different rating tools just subjectively select what data to measure at the moment,” LaCroix said.

Marsh and WTW’s programs are relatively new. And whether the brokers are using their scoring systems to deliver savings for customers is still a mixed bag.

Marsh declined to say if any corporate customer saw savings in their D&O policy purchases directly as a result of its score issued to that company. Sally Roberts, a spokesperson for Marsh, said the broker expects carriers to consider insurance discounts for its clients with good ESG practice when annual D&O policy renewal discussions come up.

WTW’s ESG models “aren’t directly tied to” coverage decisions yet, Douglas Menelly, the company’s spokesperson said. “We are in discussions with carriers about how to incorporate ESG scores into the underwriting process, and it’s still quite early days.”

Some insurance carriers are also intrigued by how ESG factors into their risk assessment of corporate clients. Beazley, a specialty insurance carrier based in London, says it offers companies with stellar ESG policies up to an additional $2.5 million in coverage—on top of the $25 million maximum D&O policy limit—through Lloyd’s of London, according to James Rizzo, a D&O underwriter at Beazley.

“If a company performs better on the ESG front, we’re gonna fight a little harder to win,” he added.

Skeptical Reaction

Other non-insurance companies, such as S&P Global and MSCI, offer ESG scores to businesses that want to tout their ESG credentials. Given these options, some industry watchers wonder why brokers are getting into the increasingly crowded field.

Many publicly traded companies are now expected to have robust ESG programs. And good ESG performance may not necessarily lead better coverage.

“I just don’t think that a good ESG score from a broker is going to impact my premiums as a buyer at all,” said Penni Chambers, board director at Risk & Insurance Management Society Inc., an industry association for risk managers.

Chambers said she hasn’t seen any insurers asking for ESG scores in underwriting or better coverage for any businesses with good ESG credentials.

Christy Kaufman, Zillow Group’s vice president for risk management, also said she hasn’t seen insurers offer price cuts to reward good ESG ratings. But a company may face a “surcharge” if it can’t show solid ESG initiatives, she said.

The fuzzy nature of measuring good corporate citizenship is also a hurdle for insurance brokers or carriers seeking to standardize ESG scoring, especially in the face of accusations of companies’ “greenwashing” claims.

“It’s far more storytelling and conversational than hard data,” said Amy Barnes, Marsh’s head of sustainability & climate change strategy. An insurer’s evaluation of ESG credentials is “quite subjective,” she added.