Aspen's chief investment officer and chief underwriting officer discuss how they collaborate on sustainability and how insurers can tackle sustainability holistically.
The dichotomies between the asset and liability sides of an insurance balance sheet are legion.
While liabilities are the domain of actuaries, investments professionals can come from many backgrounds. Investment teams at insurance companies often bemoan what they perceive as small-scale resources compared to their well-staffed liability colleagues, even though, often – at least in the not-so-distant past of low interest rates – investment teams were driving insurers' profitability.
In the realm of sustainability, the Net-Zero Asset Owner Alliance (NZAOA) is thriving, while the Net-Zero Insurance Alliance (NZIA) nearly reached extinction last year, and is now in survival mode after numerous groups left it.
As the dust was settling from the NZIA debacle, at Insurance Asset Risk 2023 EMEA conference in June, it was suggested that it was easier for insurers to engage with companies through their investments than on the underwriting side. Companies look for debt- and equity-based funding and in that dynamic the investment team is a client. When the same company looks for insurance it is then a client able to shop around if denied coverage by one provider.
Of course, if denied the funding, the company could also try to source it from somewhere else, but the argument is, engagement as an investor works where it doesn't as an underwriter.
At Aspen, chief investment officer, Aileen Mathieson disagrees.
"I don't agree with the idea that it is ok to underwrite something forever that you are not prepared to invest in," she tells Insurance Asset Risk. "And, at Aspen, we believe that the same way an investor can engage with an investee, an insurer can engage with its clients."
Taking the example of the contentious topic of energy companies, Mathieson argues that providing an insurance cover is a responsible thing to do from a social point of view, but doing that does not prevent the insurer to push for a change in business model. "Insuring is not only about the premium, you also offer tools and incentives to help mitigate the risk."
Christian Dunleavy, chief underwriting officer at Aspen, acknowledges there might be some truth to the 'client argument', but he tells Insurance Asset Risk that on sustainability things are shifting, and the "gap between what the investment team and the underwriting can do is not as wide as one might think".
This has been recognised by climate campaigners. If a few years ago they were calling for insurers to stop financing polluting companies and industries, today their focus is clearly on getting the insurance coverage tap shut – without insurance coverage, there is no licence to operate.
However, Dunleavy sees the role of insurers more as enablers to the transition. If an entire sector or industry is shut down overnight it might solve environmental issues, but it will create some social problems, and so "for the insurance industry the key consideration, is how do we help our customers navigate this transition and support them through the journey".
"The insurance sector has the ability to provide some insight to help move people away from certain practices towards others," he argues. "And the investment community has that exact same leverage at times, maybe ours is more carrots and theirs is more the stick."
Furthermore, clients ask for that insight, Dunleavy says. While discussing renewals they want to know how the re/insurer analyses their portfolio and risk exposure, if they have any blind spots and how it compares with their competitors.
Clients value that feedback, he adds. "But we can't tell them what to do - at the end of the day, they're going to run their own businesses how they see fit."
Nevertheless, things are not as simple as 'I can't get insurance with x, I will ask y or z', Dunleavy says. "Some of these sustainability themes, even beyond climate, things like weapons, cigarettes, are topics which are central to the global conversation now, so it is becoming a generalised way of doing business".
CIO and CUO hand in hand?
Even if Insurance Asset Risk spoke to Mathieson and Dunleavy separately, both said they collaborate regularly, especially when it comes to sustainability – both sit on the sustainability committee at Aspen.
There are two lenses to it. First, collaboration is necessary to make sure investment and underwriting portfolios don't clash, i.e. that they are not exposed to the same risk. A fictitious example would be investing in a building which is also on the insurance book. But it can also be less granular then that, looking at geographies where Aspen underwrites climate risk, and making sure that the investment team is not investing in properties in those geographies that could be hit by natural catastrophes.
"Then there are more subtle crossovers," Mathieson says. "Often when we consider an investment, particularly if you think investments in real estate or infrastructure, we would go to Christian and his team for their views on how the building has been built and the risk associated with it."
The collaboration with underwriters helps the investment team getting a more granular understanding of the risk, she says. "Take flood risk for example, that could be linked to climate-related factors or [the risk could exist] because of increased urbanisation which could be the consequence of a number of things, such as urban centres spreading out, or housing affordability and people building houses on cheap land."
As the underwriters develop this understanding, their models are evolving and are increasingly forward looking, Mathieson continues. "This is where I feel we can evolve the cooperation between both sides, investment decisions being informed by the past [thanks to the underwriters' modelling] rather than being an extrapolation of past investment performance".
The information provided by the underwriters is then used by Mathieson and her team in their discussions with asset managers, on top of the usual discussion around credit analysis, "to ensure that all these sustainability factors have been considered by the asset manager and how".
"Ultimately, It's a qualitative exercise because it is done on a case by case basis," she says. "And we are far from the stage where the data that comes out of the underwriters' models is dumped in our models and the two will run seamlessly. So it continues to be a conversation."
Similarly, Dunleavy says that at this point both teams are learning from each other. Interestingly, if Mathieson looks for data from Dunleavy's team, Dunleavy also looks for data from Mathieson's team.
"We have a pretty mature view of risk, particularly around climate risks, so, there are opportunities to help the investment team think about aspects that maybe are not 'top of mind' for them when they're evaluating an investment opportunity," he says. "But it also goes in the other direction, which is some of the information that investors are requiring from companies could help with the way insurance information is getting reported as well."
Generally, the underwriting industry can be quite slow to move from a data perspective, whereas the investing world moves a bit faster, he continues. "You have certain industries, for example, that have been around a long time, they may not have ever really been collecting the kind of information that is needed to report on things like their carbon footprint, for example, and it may take the sectors a bit of time to gear up and do that. But today, if they are pitching for funding to institutional investors, most investors won't even consider investing if that information is not available or [unless] you can provide some answers."
Translating underwriting to investors and vice and versa
If the collaboration between CIOs and CUOs and their respective teams is a qualitative one based on conversations, is there a risk of things getting 'lost in translation'? Are actuaries and investors talking the same language?
Dunleavy doesn't see this as an issue as "insurance and investing has converged in a large way with insurance-linked securities, and we're smart enough to do the translations back and forth".
"Maybe the measures we use are more different than the language," he says. "Investment teams will be looking at it on an IRR basis, when the underwriters will be looking at loss ratios, for example."
Mathieson says it helps that both teams have actuaries in their ranks. "But think about it even within investments, when you say 'carbon footprint', and how you measure it – two investment teams won't have the same definition."
The value of the interaction between investment and underwriting teams seems obvious, so why is it not more common practice and not more institutionalised?
"Part of it, and it's not a criticism, is that in big companies departments and teams work in siloes, that is just the way it is," Mathieson says. "Also, you have considerations around the nature of the insurer, for a life insurer who has retail clients they might have an interest in what is in the investment portfolio, for a P&C insurer whose clients are big companies, that is already less of an interest."
