Cerulli Associates' latest report, European Insurance Industry 2019: Uncovering Outsourcing Opportunities, shows a significant shift toward responsible investing (RI) in the European insurance sector.

With outsourcing rates increasing, opportunities are growing for external asset managers in the European insurance industry. Managers should ensure that environmental, social, and governance (ESG) integration is at the top of their agenda when engaging with insurers.

Around half of the insurers Cerulli surveyed exclude industries that do not meet their ESG standards, including tobacco and coal, and apply ESG scoring to the remaining investable universe. Other insurers are moving to ESG-focused benchmarks for all the major asset classes. However, integrating ESG factors across the entire investment portfolio is challenging, given the nature of certain asset classes. Cerulli’s survey of European insurers found that 38% of respondents integrate ESG considerations only in certain asset classes.

A key example is government bonds, which represent a major share of European insurers’ portfolios. Despite the importance of ESG integration in the asset class, so far little information is available regarding best practices or how to approach ESG integration in this area. Some insurers use a similar strategy as for their credit portfolios—they apply a minimum ESG rating of BB to their sovereign bond portfolios.

“As insurers expand their use of RI approaches, they increasingly want to measure the environmental and social impact of their portfolios,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report. “Asset managers need to develop innovative ways to measure and report the impact of investments.”

The insurers that Cerulli surveyed employ a wide range of RI strategies, with ESG integration, used by 55% of respondents, the most popular approach. Location often dictates approach. More than half of the French insurers Cerulli surveyed employ a wide range of RI approaches, with impact investing and thematic investing currently the most popular. Swiss insurers expect ESG integration, active ownership, and thematic investments to be the most common approaches over the next 12 to 24 months. German insurers focus less on RI than their peers elsewhere in Europe—only the largest players have RI policies addressing ESG integration. In contrast, Nordic insurers typically have well-defined RI policies that cover the majority of their assets under management.

“Insurers across Europe are increasingly trying to adopt a holistic approach to RI,” says Deveikyte. “Managers need to be ready to discuss ESG integration with insurers over the coming 12 to 24 months. They should be prepared to give clear advice on what insurers should be considering buying and excluding and what the important factors are when it comes to ESG investing.”

This and several other new findings make up Cerulli Associates’ European Insurance Industry 2019 report.