The insurance industry is the primary underwriters of the global economic system. Climate concerns and other environmental issues are particularly important. This was evident last year, when representatives from insurance companies and reinsurers from around the globe traveled to Cancun for COP-16. It included a side session that focused on climate adaptation, risk management, product innovation, and how to manage the risks. The event covered everything that climate change will have on everything, from the Caribbean’s catastrophe risk to micro-insurance programs in agriculture.
The potential for the insurance industry to contribute to society’s efforts in addressing the challenges identified at COP-16 is immense. The U.S. National Association of Insurance Commissioners recognizes this unique position in a whitepaper The Potential Implication of Climate Change on Insurance Regulation. It states that the insurance industry is “uniquely positioned between two ends of climate-change spectrum-the causes and impacts…Insurers have potential to be significant innovators in helping to solve climate change by managing and mitigating both of these impacts.” NAIC has a Climate Change and Global Warming Task Force that coordinates ongoing analysis of the impacts of climate change on consumers, providers of insurance, and regulators.
Even more impressive is the fact that insurers all over the globe are developing policies and products to address new risks and capitalize upon a sustainable business-scape. Michael Diekmann, CEO of Allianz, stated that climate change has increased the insured losses of our clients by 15 times over the last 30 years. We are working on new solutions to future risks that might otherwise not be adequately covered. Investments in renewable energy sources, more efficient technologies and other innovations will provide new opportunities for our clients and help to address climate change. Sustainability and environmental issues are more than corporate citizenship for Allianz. They are a new way to do business.
Global industry leaders and prominent associations, as well as international organizations, are looking at what climate change and other environmental concerns mean for the insurance sector and what opportunities they will open up. What does this mean for the individual insurance companies as well as their leaders? Insurers should incorporate environmental thinking into their strategy for four reasons:
- Green Programs to Save Money In addition to the obvious cost savings, insurance companies can also reduce the cost of servicing claims by mandating better environmental performance from business partners. Folksam, a Swedish insurer, saved $40 million by encouraging reuse of original parts in its campaign to improve the environmental performance of its partners in the automotive repair-chain. This was over a five-year period.
- Make Money-Green Products have Higher MarginsClimate mitigation and adaptation are poised to revolutionize the insurance industry over the next decade. Changes in weather patterns, for example, will pose a threat to insurers that aren’t prepared but can provide new opportunities for those who are able to adequately underwrite new risk factors. There are many new products being developed due to growing concerns about climate stability and energy security. These products range from Lloyd’s of London, which offers insurance for energy efficiency or predicted energy savings, to Swiss Re, which provides insurance for the developers of carbon-reducing Clean Development Mechanism products. Climate-related insurance is still a relatively new field of insurance. However, the competition is low relative to other products and the pioneers will enjoy higher returns. As demonstrated in the Folksam case, applying new generation environmental thinking to existing products can help increase profitability.
- Manage risk – New environmental issues & regulation are risks that insurers must understand According to the UN Environmental Program, losses due to climate change could exceed $1 trillion per year within 30 years. Insurers must be able to recognize this risk at a strategic level, and then invest in programs and partnerships to find the best solutions. Allianz, for example, has established a cross-company working group on climate change to create and implement plans for each company’s major branches. Insurers must also monitor climate laws like California’s AB 32 and think about how they might affect businesses. Companies still have the opportunity to influence these policies at an early stage of the game. The UNEP’s 21 participating companies in its insurance work stream play an active part in directing future regulations. However, laggards risk being assessed according to standards that they did not create.
- Increase Brand Value – Insurers Have a Public Mandat to Act as Responsible Communities Partners Customers are key stakeholders for all businesses and are increasingly loyal to companies that promote responsible environmental practices. Particularly, insurance companies stand to gain from being seen as responsible stewards in the communities and industries they serve. It can be difficult to differentiate products in the insurance industry. This is illustrated by numerous television advertisements that tell viewers how just 15 minutes can save 15% on insurance. Your company can be the one that protects the environment and communities, so it is worth establishing your company as an insurer.
Insurance is complex. Incorporating environmental thinking into insurance strategy is another difficult issue. This challenge presents an opportunity for underwriters to work in a more sustainable society.