June/July 2013: Ethical Insurance

The Co-operative’s entry into ethical insurance should be a sign of good things to come in the sector, but is it? Helen Yates investigates

While ethical finance or socially responsible investing (SRI) has been offered by the banking sector for many years, the insurance industry has been slower to follow suit. In 2011, news that the Co-operative had become the UK’s first insurer to “ethically screen” the assets that underpins its insurance business was well-received.

However, in March 2013, the Co-op announced it had reached a £220m deal with Royal London to sell its life insurance and asset management arms, including five sustainable screened funds. It follows Alliance Trust’s takeover of the Aviva SRI team. Henderson Global Investors also recently pulled out of SRI, with its team moving to join multi-strategy investment boutique WHEB Group.

While insurance companies should be perfectly suited to SRI, in reality the sector still has a long way to go and these recent developments are less than encouraging, thinks Ketan Patel, senior socially responsible investment analyst at Ecclesiastical.

“The larger insurance institutions have dealt with SRI as more of an add-on because most of their investment funds are not screened, whilst at Ecclesiastical the majority of our retail funds are SRI screened, so we’re the complete reverse,” he explains. “You would think the insurance industry would be a natural bed for SRI, but it’s not the case really.”

Many of the products underwritten by insurers – such as life and health insurance – are long-term in nature, or “long-tail”. This means that a claim could arise many years after a product has been taken out. As a result, insurance firms need to match their assets to their liabilities and thus need investments that are long-term in nature.

“If you’re an insurance company and you’re matching long-term liabilities over multiple cycles. This should allow for a better alignment towards sustainable or responsible investment, which is focused on delivering long term sustainable returns,” explains Patel. “We’re optimistic that as more and more firms embrace responsible investing that will catch on.”

Can SRI deliver?
Embracing a responsible approach to investing means screening assets to ensure they do not include unethical stocks. This could be firms linked to the arms trade, tobacco manufacture, fossil fuel extraction or the fur trade.

“Where the real skill comes in is picking companies that are doing good things – whether its environmental social or governance (ESG) – and the argument is that by doing these things really well, they’re going to have a better risk profile and generate better longer-term returns than their peer group,” explains Patel.

While the ethical finance sector has demonstrated impressive growth, even through the recession, there is a school of thought that a screened portfolio of assets delivers a lower return. In the low interest rate environment when investment returns are already reduced, this could prove a deterrent to more insurers wanting to embrace SRI.

“The wider investment community will always argue it is their fiduciary duty to get the best return for the client and there are a lot of firms out there whose time horizon is very different from ours and whose ownership is different – they’ve got shareholders to answer to,” says Patel. “Many investors believe there is a binary choice, that if you invest ethically or socially responsibly you are giving up performance, because certain aspects of the market are not going to accessible to you.”

He thinks the industry will only begin to invest more responsibly when the right pressure is brought to bear, most likely through regulation. “Ultimately there’s really no incentive and it’s got to come culturally from within a firm,” he says.

“We’ve advocated the fact we think you can do SRI and make money and we’ve proved it over a number of years – as long as you run it for the long-term.”

Changing behaviour
The other part of the equation is demand and whether there is enough demand for customers for ethical insurance products. The third sector has a role to play here, but again in a tough operating environment it is uncertain whether it is an insurance company’s ethical credentials or the premium on offer that is driving purchasing decisions.

“One of the interesting things for us is that ethical investment seems to have become less important for our members over the last few years,” says David Membrey, deputy chief executive of the Charity Finance Group. “You could argue it’s because SRI is so readily available now or it’s because of the economic downturn and that ethical considerations are only important when times are good. That’s slightly more cynical view but trustees obviously have a duty to safeguard charity assets and there is an element of that.”

“As people understand the market better they realise it’s not a simple case of balancing price against values and that’s happened to some extent with ethical investment,” he continues. “You don’t automatically get a poorer return from an ethical fund. There is a wide range of ways of being ethical with investments and as the market gets more mature people understand it’s not a simple black and white thing.”

“The key is for the individual charity to understand what its values are,” he adds. “In some areas it will be easier to work ethically and sustainably and in other areas not so easy. But if a charity decides to go for a slightly cheaper insurance policy, which is not sustainable or ethical, that’s going to disillusion the staff and undermine its donor base. You can’t be charitable and have very strong values without implementing those values throughout your organisation, not just at the front line where you’re delivering services.”

Due diligence
Nevertheless, it appears that SRI currently plays more of a role dictating a charity’s choice of bank than its insurance product. The advent of price comparison websites has not helped, as it has further commoditised mainstream insurance products. Membrey encourages trustees to carry out due diligence on insurers to discover if they screen their assets can be time consuming.

“The banking and insurance markets are very different and consumer attitudes and perceptions of each vary significantly,” says the Co-op’s Lee Mooney. “For example, if a person puts £10,000 in a savings account they are likely to know that this would be invested by a bank, and therefore they may well have an opinion about how that money is invested. However, the majority of people may not be aware that their insurance premiums are invested in the same way.”

“Ethical and sustainable banking has a much longer pedigree and insurance is seen as one of those boring things that nobody really wants to pull the carpet up and see what’s underneath,” adds Membrey. “Hopefully people like Co-op will make it their mission to change that and make sure people understand what their insurance is about.”

“It would be interesting to see how many companies in the insurance sector held Primark's parent listed company or any of the other companies involved in the Bangladesh factory collapse, or if they’re publishing their voting records on corporate governance,” says Patel. “It’s not just about being ethical, it’s also about being transparent. It is very early days [in ethical insurance] and it’s fragmented – there’s a lot of opposition out there, but in time, hopefully it will turn around.”

Helen Yates is a freelance journalist

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