Are Insurance Brokers’ Exposing Themselves to Risk?
Insurers have a key role to play in tackling sustainability challenges. In an article written for the blog of the MIT Sloan Management Review a few years ago, we explained why this role might be even more important than that of the banks.
At the international PSI-Allianz event held in Munich last week, senior insurance managers confirmed that they were eager to address sustainability challenges across a variety of issues, ranging from excluding coal and tobacco companies from underwriting and investments to protecting World Heritage sites. Even regulators – from both national and supranational authorities – stated that it was time for insurers to take sustainability challenges seriously.
However, talking to E&S risk experts working at insurers, it becomes clear that implementation is still lagging behind. Why? Insurers almost always point to brokers, who are important intermediaries in the insurance market. They connect their clients to insurers, who then underwrite the clients’ risks. Insurers claim that brokers make it difficult for them to discuss E&S risks with clients, and that brokers often connect clients from controversial sectors with insurers who do not assess E&S risks.
In Munich, broker industry representatives seemed to adopt a defensive stance. One representative of a major broker firm was eager to point out that brokers were concerned that they would lose clients if they addressed E&S risks. He stated that brokers simply advise clients, and compared their role to consulting companies such as McKinsey. This confirmed the assumption that brokers are hesitant, if not reluctant, to make a constructive effort to mitigate E&S risks.
Looking at the regulatory expectations raised by soft law, it is clear that brokers have the same responsibilities as any other company. They are expected to conduct due diligence to respect human rights and to ensure responsible business conduct. In this context, omission is usually seen as action. Such omission is sometimes interpreted as a deliberate decision to prioritize revenues over political, scientific or societal concerns, or – in other words – a failure to mitigate the “adverse impacts” to which brokers are linked via their business relationships.
As long ago as 2014, in another article for the blog of the MIT Sloan Management Review, we explored whether companies or their managers could become vulnerable to claims for losses attributed to climate change. Our point of departure was the assumption that “at some point, affected parties will claim damages […], especially if insurance is unavailable or unaffordable.” We then asked who could be targeted by such legal action. Plaintiffs may argue that brokers have knowingly undermined the attempts of insurers and their supervisors to support climate policy objectives. In our opinion, brokers, particularly the larger ones, should assess whether they could face such claims in the future. However, regardless of their findings, they should take the existing normative expectations into account and address E&S risks with their clients.