A sensible stance on “softer” risks

The so-called “softer” risks in the environmental, social and governance sphere – collective referred to as systemic risk - are on the rise. FAnews spoke to Vanessa Otto-Mentz, head of Santam’s Strategy Unit, about this global shift in the risk landscape and its impact on the insurance industry.

FAnews: What do these “softer risks” entail and what are the implications for the industry?

Vanessa: “Softer” risks refer to the ESG - Environmental, Social and Governance - risk factors, which are collectively referred to as systemic risk. These risk factors are on the rise, from fires, floods and storms resulting from environmental changes, to infrastructure failure and social instability.

This is concerning news for individuals, businesses and insurers, because it means that disruption and losses may occur more frequently and/or more severely in future, if steps are not taken to reduce the level of risk. The scale of the risk exposure – some call it “grand challenges” – is of such a magnitude that a single insurance company acting alone cannot adequately respond to these risks.

At Santam we believe the insurance industry as whole must develop a sensible response to these increasing risks through dialogue, pooling our collective risk management expertise and taking collective action to improve overall resilience.

FAnews: What is your role in this collective effort?

Vanessa: I joined Santam in 2003 as Head: Audit, Forensics and Risk, and now I head up Santam’s Strategy Unit, responsible for the facilitation of the executive committee’s strategy process. I am also responsible for strategic coordination in the Santam Environmental Forum and serve as a member of the Sanlam Group Environmental Committee.

In the local industry, I have taken up an industry role for the South African Insurance Association to facilitate the development of strategic response for the short-term insurance industry regarding sustainability and systemic risk. And on the global stage, I am a member of the UNEP FI Insurance Commission Board, the Principles for Sustainable Insurance project team, and the Management Committee of ClimateWise initiatives.

FAnews: What specific decisions and actions have Santam taken in response to the rise in systemic risks?

Vanessa: The most important decision Santam has made is to build our response into our business over time and not to merely bolt it on.

This covers our own internal responsibility, for example, energy efficiency, as well as the impact on our business and thus on our business partners and clients. In our view, this is the only authentic response. So-called “green-washing” will not add any value, not will it address the imperative of responding to the systemic risks that impact sustainability into the future.

As such, during this year, we have focussed on advocating the importance of systemic risk (ESG) as an important factor in our business landscape, dedicating time and resources to raise awareness of ESG through SAIA, the Santam Sustainability Report and public endorsement of Copenhagen Communique, among others.

We have joined other like-minded insurers across the globe through ClimateWise and the UNEP FI Insurance Working Group on Principles of Sustainable Insurance to learn and develop new practice. We have gone into partnership with the UCT Centre for Criminology and the CSIR to understand how specific risk factors are shaping a given landscape from a systems perspective.

In addition, we have completed our solar geyser replacement offer pilot and continue our internal energy efficiency drive and participation in the CDP project.

FAnews: How do ESG risks affect underwriting at grass-roots level?

Vanessa: Underwriting is a core discipline in insurance. It is at the heart of how risks are viewed, in other words, how risks are rated and priced, and from which base products and solutions are made available. It takes account of different factors the underwriter perceives as relevant to the risk being underwritten. An important aspect of my role at Santam is to ensure that our overall strategy, which includes our underwriting capability, takes account of the longer-term future drivers that may alter current assumptions, and systemic risk is undoubtedly one of these drivers.

FAnews: How does systemic risk affect brokers? What should brokers do?

Vanessa: Systemic risk affects all of us. Our broker partners play a very important role: helping their clients to understand the risks they face – which increasingly include ESG risks - and how to protect themselves against them. Good risk advice to clients is the cornerstone of effective insurance, and many brokers, especially international brokers, have invested much in understanding the increasing levels of ESG risks.

FAnews: The picture of our environmental future is often painted as very bleak. Is there any good news?

Vanessa: The medium- to long-term outlook for the environment is indeed not very rosy, if we continue to live and do business the way we currently do. At some point, the limits on our resources will be reached with dire consequences for all of us – a very topical and local example is the water crisis in South Africa.

The good news is that there are companies and individuals who are taking action, and these actions do add up and make a difference. Further good news is that nature offers many solutions to the problems we face and these are being harnessed commercially in a field called biomimicry. This era of low carbon development and the biomimicry industry will bring many new business opportunities for entrepreneurs.

FAnews: What does the future hold?

Vanessa: I am excited about the opportunities in cross-sector multi-stakeholder collaboration where we can start sharing data, learning and improving our overall ability to manage the broader systemic risks as a collective. It has been done effectively before – just two examples are the flood risk initiatives by the Association of British Insurance and the HIV/AIDS modelling facilitated by the Actuarial Association of South Africa. The South African Risk and Vulnerability Atlas planned by the CSIR and Department of Science & Technology is but one example of how we can start building a collective understanding of the future risks, based on good data, which will allow us to develop better responses.

Much value can be created by improved risk management by all – indeed this was one of the core findings of the UNEP FI study on sustainable insurance. Effective risk transfer and value creation follows a good risk management process of identification, understanding and mitigation. This is good common sense which makes reduces losses for all.