UK: Bulk Annuity Market In Focus: Are Insurers Reporting ESG Improvements?

Based on WTW's 2023 ESG survey of bulk annuity insurers, there is evidence of insurers continuing to improve their ESG stances and enhancing their policies and resourcing, with insurers generally improving their overall ESG ratings when compared to WTW's 2022 ESG survey.

As Environmental, Social and Governance (ESG) remains a boardroom issue, WTW's 2023 ESG survey of bulk annuity insurers shows that insurers continue to improve their ESG rating through enhancing their policies and resourcing when compared to WTW's 2022 survey.

Trustees and pension scheme sponsors are increasingly interested in how insurers are approaching ESG concerns when shortlisting their preferred bulk annuity provider. Larger schemes, in particular, have developed clear ESG policies and will be looking for bulk annuity insurers to demonstrate alignment.

Bulk annuity insurers hold substantial long-term assets that could be exposed to significant future climate-based risks. These long-term assets often contribute to a better society by their nature e.g. social housing, renewable energy and infrastructure investment. The expectation is therefore that ultimately, trustees', sponsors' and bulk annuity providers' support for ESG intersects.

As this is an area that is developing at pace, WTW's current approach is to raise the bar each year in order to avoid the process becoming a tick-box exercise. Despite the higher bar, all insurers reported developments and/or improvements in their ESG analysis and overall integration of ESG within their investment processes within the last year, including improvements in modelling, data sourcing and additional personnel dedicated to ESG activity.

The ESG survey scope

WTW's ESG survey focuses on four main areas: how ESG considerations feed into the respondents' firm-level policies and then specifically, the bulk annuity portfolio level, the firms' approach to stewardship, and finally, climate risk. We then compiled the responses to these questions to produce an overall star rating for each respondent, with annual surveying covering both insurers active in the bulk annuity market and reinsurers. This article focuses on the results of the insurer survey. The reinsurer survey will be the subject of a follow-on article.

There is a general recognition that ESG concerns are important to policyholders, not just in terms of their social consciousness but also in terms of providing continued returns over the longer term. Insurers are continuing to bolster internal governance to ensure that ESG forms an integral part of their investment processes, and their corporate governance more widely. We would expect that ESG will continue to be a prevalent theme for the market over the coming years, as insurers continue to develop their modelling capabilities and general ESG integration.

Majority expand firm-wide policies to cover Human Rights

Firm-wide policies show signs of improvement. Two general areas of improvement over 2023 are:

• The expansion of resourcing and expertise, with 33% of insurers indicating that they have made further investment into expertise or data over 2023.
• Direct investment, with the majority of firms providing details on their investment in 'green' assets in line with various specific targets and initiatives.

WTW's 2023 survey also included additional questions on:

• Influencing third parties
• The extent to which time/resource is dedicated to stewardship activities
• Reporting under any of the Modern Slavery Acts and whether organisational processes are in place to assess and address modern slavery risks
• Whether insurers are signatories to the PRI Human Rights Initiative.

66% of firms indicated that they maintain a publicly available statement concerning their approach to human rights, potentially becoming themselves an influence on those bulk annuity insurers who do not yet have a public position on human rights. As the majority of bulk annuity insurers are integrating human rights into their responsible investment assessments, the outliers may also miss out on the associated related improved financial risk management outcomes.

But adequacy of ESG data continues to be a hurdle

With regards to portfolios backing bulk-annuity business, all firms consider the ESG risks for investments, embedding such analysis into their investment process, with the majority adopting their own proprietary ESG scoring system. All insurers recognise the importance of ESG factors in providing long-term positive outcomes for their policyholders, with some insurers providing further detail on how ESG considerations factor mechanically into their investment selection process. 33% of bulk annuity insurers reported ESG considerations as having a significant influence on their portfolio.

All insurers recognise the importance of ESG factors in providing long-term positive outcomes for their policyholders.

However, several insurers highlighted that adequacy of ESG data continues to be a hurdle to full integration into their investment strategies. Of course, ESG data concerns don't just impact bulk annuity insurers – this, therefore is sure to be an area that evolves quickly as ESG is more widely integrated into the way conscious businesses as a whole choose to operate.

Final thought

Schemes coming to market can't just assume that the higher-rated insurers, or those rated the same at a headline level, are the same when it comes to ESG – there are differences in the individual areas which may be more or less important to different schemes. When doing a transaction, schemes enjoy an optimal point of influence with insurers and this can give a meaningful platform for schemes to push insurers to do more and to be better in the areas most important to that scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.