ESG parameters for predictive modeling of D&O exposures

Whereas the benefits of ESG analysis for investors is widely publicized and institutional asset managers make heavy use of a number of sustainable investing approaches, there is no research on the relationship between companies’ sustainability and ESG parameters and the risk they pose to their insurers, particularly in the Director’s and Officer’s (D&O) Insurance segment.

In order to fill this gap, Allianz Global Corporate & Specialty SE (AGCS)  has partnered with The Value Group  to further investigate the relationship between companies’ ESG performance and the probability, frequency and scope of harmful events. The new modelling approach focusses on both ESG-related metrics such as corporate governance as well as other Quality parameters including compliance standards.

The results show that ESG and Quality Parameters are far more than just tools to achieve social and environmental progress. Across the board, ESG parameters have a highly significant predictive power for all types of harmful and loss events. Our data show that there is a strong correlation between sustainability data and the probability of events that cause financial or reputational harm to a company as well as damage to society as a whole. Such events could ultimately trigger D&O claims.

As a next step of their cooperation, AGCS and Value Group plan to co-create and develop a predictive model for AGCS’s Financial Lines Underwriters globally that will boost their analytic capabilities when assessing the performance of companies.

Shanil Williams, Global Head of Financial Lines explains: “I am incredibly excited about our partnership with the Value Group. D&O underwriting has traditionally been focused on financial risks due to the driver of claims being bankruptcy and financial statement issues. The world has changed, D&O claims are coming from all angles and we need to be nimble to adjust our underwriting approach to be more data driven and predictive model based. Modelling thousands of data points correlated to claims data presents powerful information for our underwriters we plan to evolve this into a service offering to clients where we can start our risk dialogues based on new and innovative risk scoring. This is the future – clients and insurers having a partnership approach to mitigating and predicting risk based on data.”

Claus Duerndorfer, MD and founder The Value Group says: “Over the course of a three-year joint project between The Value Group and AGCS, it was confirmed that systematic integration of financial-, non-financial- and ESG-data creates deeper understanding of risk factors. The project derived a set of KPI’s that have a significant power to predict future risk events. Building on their history of fruitful cooperation, AGCS and The Value Group will continue to develop analytical tools to support the underwriting process at AGCS.”