By Gareth Baines, PARTNER RISK Solutions
There is a conversation happening in commercial insurance that I think deserves more scrutiny than it is currently getting. ESG has arrived in underwriting, and by most accounts, it has arrived to stay. Reinsurers reference it in treaty discussions. Risk questionnaires now carry ESG scoring sections. Insurers have incorporated it into formal assessment frameworks. None of that is surprising given where capital markets have moved over the past several years.
What concerns me is not the presence of ESG in underwriting. It is the often-unstated assumption that all three components carry roughly equal weight when an underwriter is pricing a 12-month commercial property risk. In my view, they don’t. And conflating them does not serve underwriters, brokers or clients particularly well.
When the Framework Does Not Fit the Decision
Short-term property insurance is exactly what it says it is. We are pricing the probability and severity of loss within the coming policy year. That is the discipline. Everything an underwriter does, the catastrophe modelling, the loss history review, the site assessment, the governance enquiries, is in service of that single question: what is the expected loss cost for this risk over the next twelve months?
ESG frameworks, in their original conception, were built around a very different time horizon. Decarbonisation pathways, climate transition risk, and long-term environmental resilience are genuinely important considerations, but they operate over decades. Applying a framework designed for decade-scale analysis to a 12-month pricing decision requires a level of translation that the industry has not always been honest about needing.
When a reinsurer includes environmental scoring in a treaty negotiation, I don’t think they are primarily adjusting their 12-month loss expectation. They are signalling alignment with capital-market expectations and managing their own stakeholder positioning. That is a legitimate business decision. But it is a different exercise from underwriting science, and treating it as the same thing muddies the analysis.
What KZN Actually Told Us, If We Were Paying Attention
The April 2022 floods were a defining loss event for this market, and the reinsurance response that followed was significant. Capacity tightened, terms hardened, and environmental risk moved up the agenda in ways it had not been before. Most of that response was understandable.
But if you look carefully at what actually drove the severity of those losses, the picture is more complicated than a straightforward story about extreme weather. The rainfall intensity was exceptional, yes. It was also true that drainage infrastructure across large parts of the affected areas was inadequate, maintenance regimes had deteriorated over the years, and development had occurred in locations that compounded the exposure considerably. The meteorological event triggered the losses. Infrastructure vulnerability determined how bad they became.
For underwriters, that distinction is not academic. If losses are being driven primarily by infrastructure fragility rather than a fundamental shift in event frequency, the analytical response is different. You look at municipal maintenance records, flood defence conditions, and drainage capacity relative to development density. You reflect what is knowable and measurable in your deductible structure, your sub-limits, and your risk aggregation management. You do not simply apply an environmental score and move on.
I am not dismissing the reality of changing weather patterns. The data on increasing loss severity from weather-related events globally is credible, and I take it seriously. My point is that the causal chain matters for underwriting purposes, and it is being simplified in ways that do not always help us price more accurately.
The Two Letters We Talk About Least
In commercial property underwriting, Social and Governance factors are, in my experience, the components of ESG that most directly influence expected loss within a 12-month horizon. They are also the ones most underrepresented in the broader conversation, which tends to be dominated by environmental discourse.
Think about what actually drives attritional loss in a commercial property book. Repeated small-to-medium claims are rarely random. They reflect something about how a business is run: the health and safety culture, the quality of contractor oversight, the consistency of maintenance, and the discipline around incident reporting. A business with genuine operational maturity produces a different claims profile from one where safety systems exist on paper but not in practice. That difference shows up in the loss history and attitudes to risk management. It is directly relevant to pricing.
Governance carries similar weight, and in the South African context, we have King IV as a well-established reference point. Governance maturity is something underwriters can actually probe and assess. It influences whether the declared asset values are reliable, whether maintenance obligations are being met, whether a material change in risk exposure will be notified during the policy period or discovered only at the claim stage.
Weak governance increases uncertainty. Uncertainty costs money in pricing terms. That is not a soft consideration. It is a concrete one.
These factors manifest within the policy year. They are testable through the underwriting process. The industry should be paying more attention to them than it currently does.
What the Post-2022 Hardening Actually Reflected
After the 2022 cat loss cycle, reinsurer appetite in Southern Africa shifted in ways that were felt right across the market. Environmental risk, aggregation exposure and climate-related volatility all featured in those conversations. Primary insurers responded, as they should, by building ESG more formally into their underwriting assessment frameworks.
I have no issue with that response as far as it goes. What I think is worth noting is that some of what happened was market signalling as much as technical pricing adjustment. Reinsurers needed to demonstrate to their own capital providers that they were taking environmental risk seriously. That translated into treaty language and questionnaire requirements that primary or direct insurers then passed downstream. The chain of influence is real. But the endpoint is not always a more accurate 12-month loss estimate.
Formalising ESG assessment has surfaced governance and operational risk factors that were previously underweighted, and that is genuinely useful. But we should be clear-eyed about where the impetus came from and what it is actually measuring.
The job of underwriting is to price risk with the best available information, within a defined policy period. ESG considerations can and should inform that process. The question is whether each component is being weighted in proportion to its demonstrable influence on expected loss within the next twelve months, or whether we are allowing longer-term market narratives to do work that the loss data does not yet support.
Social factors affect operational stability and loss frequency in ways that are visible and testable. Governance affects disclosure reliability and risk discipline in ways that directly influence underwriting confidence. Environmental considerations intersect with catastrophe frameworks and infrastructure vulnerability in ways that require careful thought about what is actually measurable within a 12-month horizon and what belongs to a different conversation entirely.
The industry has done good work in bringing ESG into the underwriting room. The harder task now is being precise about what each letter is actually contributing, and being willing to say clearly when the framework is running ahead of the science.
That is not a comfortable conversation. It is a necessary one.