The 2024 sustainability agenda for UK life and health insurers

The AAA sustainability pivots

Climate-related and broader sustainability-related risks remain highly topical and a key focus for insurers and regulators. Indeed, we believe that 2024 could be a pivot point for the industry in the approach and management of sustainability-related risks. New tools, techniques and paradigms are emerging that take a different perspective on sustainability-related risks and broader enterprise risk management. Rather than seek improvements solely through better data and models, this emerging perspective seeks to embrace the fundamental complexity and uncertainties of systemic risks.

This holistic approach means risk management efforts are not just aimed at a sustainability view, nor a business dimension or even a specific regulatory imperative. It is thinking of sustainability across the whole of enterprise risk management and asking how do we achieve better ability, better agility and better alignment?

The 2024 sustainability agenda can be seen through these "triple-A" pivots—ability, agility and alignment. We’ve outlined our top 11 priorities for the UK industry below, splitting them between 6 priorities for most insurers (underlined in our list below) and 5 opportunities for leading insurers to develop an edge (italicised in our list below).

2024 Priorities for improving sustainability ability: Becoming more skilful

1. New climate scenarios: Whilst sustainability efforts have been broadening, climate is still number one. In the 2024 “Dear CEO” letter from the Prudential Regulation Authority (PRA), the first sentence under “financial risks arising from climate” states, “further progress is required by all firms particularly on scenario analysis and risk management.”¹ So even the very best practice needs to be better.
   
   As our recent paper² summarises, there have been significant critiques of the traditional climate scenarios provided by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), the International Energy Agency (IEA) and others. Appreciation of these critiques is critical for insurers’ public disclosures, such as those in sustainability and Taskforce for Climate-related Financial Disclosures (TCFD) reports. This understanding should also inform how these scenarios are used internally, with implications for ongoing climate-related risk management.
   
   During 2024, we believe a trend of newer, more decision-useful narrative scenarios will emerge focusing on shorter-term scenarios to address some of the critiques.
2. Getting to grips with liability impacts: The PRA’s 2024 “Dear CEO” letter also states “sources of climate risk should be considered across both sides of an insurer’s balance sheet.” For life and health insurers this means understanding sustainability impacts on mortality and morbidity³. Particular attention should be paid to the potential increases in heterogeneity—climate impacts are likely to be most significant to the more vulnerable, those with comorbidities and lower incomes. This requires more care to understand the vulnerability of specific life and health exposures rather than applying broad averages.
3. Biodiversity and nature-related risks: The Kunming-Montreal Global Biodiversity Framework⁴ published in December 2022, and the Taskforce for Nature-related Financial Disclosures (TNFD)⁵ final recommendations published last September, brought a new impetus and focus to biodiversity risks. Nature is in crisis and three papers published by NGFS in the second half of 2023⁶ suggest that this will soon gain the UK regulators’ attention. The starting point is for risk teams to develop their knowledge of biodiversity risks and take a first look at their organisations’ specific exposures and risks. Leading insurers will consider the integration of biodiversity risks with their climate scenarios and net-zero commitments, along with potential impacts (or opportunities) on brand and reputational risk.
4. Being just, social and inclusive: Insurers with savings and pensions will be well advised to pay attention to the October 2023 consultation on Considering Social Factors in Pension Scheme Investments from the Taskforce on Social Factors⁷ as well as broader governmental efforts to increase purposeful investment, such as the Mansion House compact.⁸ Insurers should also consider how sustainability efforts in other areas may intersect and apply to social factors, for example the need for a just, inclusive, nature-positive climate transition.
5. AI as a sustainability risk and opportunity: Artificial intelligence (AI) is an emerging risk and business opportunity in its own right—but it also intersects with sustainability issues. Firstly, it is highly probable that AI will need to be integrated across all business functions, to ensure that business models remain sustainable in the future. AI can also be a powerful tool to support sustainability efforts, for example in helping to manage data and support transparency and disclosures. It can also support customer servicing and strategies for cost-effective financial inclusion. This upside, however, comes with a range of risks, namely exclusionary access, unintended (and potential reinforcing) biases and potential for poor or unreliable advice. Leading insurers will not only be engaging in managing their AI risks, but also looking at the intersection of risk and opportunities with sustainability goals in mind.

2024 Priorities for improving sustainability agility: Becoming more responsive

6. Gap analysis of sustainability risk frameworks: In recent years there has been an explosion in both the measures and breadth of sustainability risks and the approaches to address them. The consistency between policies, practices and articulation hasn’t always kept up and certainly not to the level of embeddedness across all business activities. Our ”ESG Strategy Survey”⁹ highlighted that industry progress on framework development is still underway, with climate being the only environmental, social and corporate governance (ESG) risk considered across the board. Yet there were still gaps even for climate risks as not every insurer had embedded climate risks into their investment risks oversight. Now, in 2024, is a good point to take stock of current efforts, make comparisons relative to peers and best practice, identify any unintended gaps and prioritise actions and next steps.
7. Developing agility for radical uncertainty: At a more fundamental level, the transitions required for sustainability—to a low-carbon, nature-positive economy—mean that the future economy will be different from the past. Almost certainly, risk dynamics will also be different. Risk tools based on backward-looking, historical calibrations cannot capture these dynamics nor the transitionary influences, which may be even greater. These uncertainties are compounded by the complex nature of interconnectivity (climate, nature and geopolitics) and the ambiguity of uncertain public policy and future pathways. Smarter use of scenario analysis, including digital twins,¹⁰ can help explore and ”pre-mortem” different outcomes. More fundamentally, addressing uncertainty means that greater agility and resilience needs to be built into organisational structure. The gaps between modellers and executives need to be closed for greater first-line awareness of potential false signals with more readiness to investigate and adapt. Executives should expect to engage more frequently with different scenarios and help identify risks and opportunities across a continually evolving landscape.

2024 Priorities for improving sustainability alignment: As required and as desired

8. Addressing greenwashing: The current Financial Conduct Authority (FCA) consultation on “Guidance on the Anti-Greenwashing rule (GC23/3)¹¹” is expected to come into force on 31 May 2024. It will require all sustainability claims to be evidence-based, presented clearly and complete as well as fair and meaningful. We believe this will drive a focus on an insurer’s broader alignments, such as its sustainability commitments and corporate values, along with the management of reputational risks. Where such claims are dependent on third-party data and management, there is an overlap with consultation paper CP 26/23 – “Operational Resilience: Critical Third Parties to the UK Financial Sector ” and the anticipated consultation on outsourcing and third-party (OATP) data collection.
9. Consumer Duty – fairness framework: Greenwashing risks and the requirement to provide clear information is one element of Consumer Duty.¹³ More broadly, fairness needs to be applied to current and, by 31 July 2024, closed products and services. Yet what is fair? And more fundamentally, who gets to decide—you, your customers or broader society? A robust fairness framework will make these principles explicit, identify where they may need to vary by business lines and determine how frequently they need to be reviewed and refreshed. The sustainability community’s work on equality and fairness can help guide and test these frameworks. This can also help identify the potential opportunities from greater inclusion and fairness.
10. Assuring your reputation: There is significant reputational risk from sustainability misalignments that arise directly, both from unsubstantiated sustainability claims and from actions that go against your brand or values. However, sustainability lacks universal definitions and there are no pure “sustainable” actions. All efforts require judgement and almost always some negative impacts as well as positive ones (e.g., wind turbines still take greenhouse gas emissions to create). Assuring alignment with reputation and values requires, firstly, to translate sustainability efforts into clear policies. These policies then require clear business practices against which efforts can be assured. For health insurers in particular, this will require increased focus on healthcare providers and suppliers to understand how aligned their sustainability plans are to those in their supply chains, including consideration of upstream and downstream Scope 3 emissions and broader sustainability impacts. All insurers will need to embed such efforts into their outsourcing oversight. Creating these alignments will be increasingly critical under Consumer Duty and anti-greenwashing regulations. And whilst they can’t eliminate reputation risk, they will provide robust practices for assuring their public commitments, addressing any alignment gaps and ensuring that regulatory guidance is met.
11. Leading on regulations and disclosures: Sustainability remains a topic of high interest. In addition to mandatory regulations there is a broader array of voluntary initiatives and “encouragements” which point the way to future efforts. Biodiversity and the Taskforce for Social Factors are two examples already mentioned. We expect leading insurers to develop climate transition plans leveraging the frameworks from the Transition Plan Taskforce (TPT). We also believe there is a significant opportunity from embracing the overarching intention of CP18/23 – “Diversity and Inclusion in PRA-Regulated Firms¹⁴” Compliance is largely formulaic, similar to the Corporate Governance Supervisory Statement (SS) 5/16,¹⁵ drilling into the intent, but developing frameworks and internal benchmarks can create a competitive advantage. This is especially true when embracing the interrelated complexity around sustainability, which then enables tensions and vulnerabilities to be identified. Finally, actuaries will be mindful of their professional duties in line with the recent ethical and professional guidance on climate change from the Institute and Faculty of Actuaries (IFoA) Regulatory Board¹⁶ and the opportunities to upgrade the approaches and disclosures within their organisations.

Of course, such a list of key themes will not be the only sustainability projects undertaken in 2024. Efforts on investment portfolios tend to be more advanced, but even here the focus has been more on reported risk metrics. Within investment portfolios there is still a need to develop tools to consider risk aggregations as well as more general weaknesses in evaluating physical risks. Attention is slowly shifting to more holistic perspectives. We anticipate that greater efforts are also likely on horizon scanning, both on specific risks and their interconnected macroeconomic impacts. Those seeking value alignment will look for ways to take better ownership of these long-term systemic risks and their agency in managing them. 

¹ PRA (11 January 2024). “Dear CEO” letter. Retrieved 26 January 2024 from https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2024/insurance-supervision-2024-priorities.pdf.

² A review of recent climate scenarios publications, available on request.

³ Examples of Milliman’s work include https://www.milliman.com/en/insight/modeling-the-impact-of-climate-risks-on-mortality, https://www.milliman.com/en/insight/health-and-hurricanes-studying-disparate-health-impact-of-extreme-climate-events-20172020 and https://www.milliman.com/en/products/milliman-health-climate-vulnerability-model. Retrieved 26 January 2024.

⁴ Convention on Biological Diversity. The Biodiversity Plan: Kunming-Montreal Global Biodiversity Framework. Retrieved 26 January 2024 from https://www.cbd.int/gbf/.

⁵ TNFD. Recommendations of the TNFD. Retrieved 26 January 2024 from https://tnfd.global/recommendations-of-the-tnfd/.

⁶ “Conceptual Framework for Nature-Related Financial Risks,” “Recommendations Toward the Development of Scenarios for Assessing Nature-Related Economic and Financial Risks” and “The Green Scorpion: The Macro-Criticality of Nature for Finance.”

⁷ Taskforce on Social Factors (October 2023). Guide: Considering Social Factors in Pension Scheme Investments. Retrieved 26 January 2024 from https://www.taskforceonsocialfactors.co.uk/siteassets/shared-media/images/uk_social_factors_consultation_v4.pdf.

⁸ City of London. Mansion House Compact: Background and FAQs. Retrieved 26 January 2024 from https://www.theglobalcity.uk/PositiveWebsite/media/research-downloads/Mansion-House-Compact-FAQ-The-Global-City.pdf.

⁹ Milliman ESG Strategy Survey Exploring the current market landscape of ESG strategies, available on request.

¹⁰ A digital twin is a virtual model designed to accurately reflect the behaviour of the insurance office, market or real-life aspect (“twin”) that is under investigation.

¹¹ FCA (November 2023). GC23/3: Guidance on the Anti-Greenwashing Rule. Retrieved 26 January 2024 from https://www.fca.org.uk/publication/guidance-consultation/gc23-3.pdf.

¹² Bank of England (7 December 2023). CP26/23 – Operational Resilience: Critical Third Parties to the UK Financial Sector. Retrieved 26 January 2024 from https://www.bankofengland.co.uk/prudential-regulation/publication/2023/december/operational-resilience-critical-third-parties-to-the-uk-financial-sector.

¹³ FCA. Consumer Duty. Retrieved 26 January 2024 from https://www.fca.org.uk/firms/consumer-duty .

¹⁴ Bank of England (11 October 2023). CP18/23 – Diversity and Inclusion in PRA-Regulated Firms. Retrieved 26 January 2024 from https://edu.bankofengland.co.uk/prudential-regulation/publication/2023/september/diversity-and-inclusion-in-pra-regulated-firms.

¹⁵ Bank of England (31 March 2016). Corporate Governance: Board Responsibilities. SS5/16. Retrieved 26 January 2024 from https://www.bankofengland.co.uk/prudential-regulation/publication/2016/corporate-governance-board-responsibilities-ss.

¹⁶ IFoA (17 January 2024). Ethical and Professional Guidance on Climate Change. Retrieved 26 January 2024 from https://actuaries.org.uk/media/h44pfpzi/climate-change-guidance.pdf.