As the underwriters of the global economy, climate concerns and other environmental challenges are a particularly poignant issue for the insurance industry. This significance was demonstrated last year when executives from insurers and reinsurers around the world traveled to Cancun to participate in COP-16, which notably included a special side session focused specifically on climate adaptation, risk management, and product innovation for the insurance industry. This event reviewed how climate change will affect everything from Caribbean catastrophe risk to agricultural micro-insurance schemes.
The insurance industry has incredible potential to help society address the challenges explored at COP-16. In the U.S., the National Association of Insurance Commissioners acknowledges this special position in a whitepaper entitled The Potential Impact of Climate Change on Insurance Regulation, writing that “the insurance sector is uniquely positioned between the two ends of the climate-change spectrum- the causes and impacts…Insurers have the potential, in keeping with their historical role, to be significant innovators in contributing to the solutions of climate change by managing and mitigating both the causes and the impacts of catastrophes brought on by such change.” To help fulfill this potential, NAIC maintains a Climate Change and Global Warming Task Force to coordinate ongoing analysis of the impact of climate change on insurance consumers, insurance providers, and insurance regulators.
Perhaps even more compelling, insurers around the world are already developing products and policies to address new risks and capitalize on a sustainability oriented business-scape. In a recent statement, Allianz CEO Michael Diekmann noted that “Climate change has increased our clients’ insured losses by a factor of 15 over the past 30 years. We are developing new solutions, including for future risks that could otherwise not be adequately insured. At the same time, investments in renewable energy sources and more efficient technologies will open up new opportunities for our clients – and will help address climate change.” For Allianz, sustainability and environmental concerns are not simply corporate citizenship issues; they are a new way of doing business.
International organizations, global industry leaders, and prominent industry associations are all thinking about what climate change and other environmental issues mean for the insurance industry and what new opportunities these issues will create. So what does it mean for individual insurance companies and the people who lead them? There are 4 primary reasons why insurers should integrate environmental thinking into strategy:
Save Money – Green Programs Save Money
Beyond the attractive cost savings which can be realized from implementing operational green programs, insurers can reduce the cost of servicing claims by dictating better environmental performance from their business partners. For instance, Swedish insurer Folksam’s campaign to raise the environmental performance of its automotive repair-chain partners to high standards saved $40 million on car repairs over a five year period by encouraging the reuse of original
Make Money – Green Products have Better Margins
Climate adaptation and mitigation is positioned to completely redefine the insurance industry in coming decades. For instance, changes in weather patterns will threaten insurers who are not prepared, but will create new opportunities for those capable of adequately underwriting new risk factors. Increasing concerns about climate stability, energy security, and other environmental issues are already inspiring new generations of products, from Lloyd’s of London offering Insurance for predicted energy savings or renewable energy technology performance to Swiss Re offering insurance for developers of carbon-reducing Clean Development Mechanism products under the Kyoto Protocol.
As a new area of insurance, competition in climate-related policies is still modest relative to other insurance products, and the pioneers will be able to enjoy better returns. Additionally, as highlighted in the Folksam example above, applying next generation environmental thinking to existing product lines can increase profitability.
Manage Risk – New Environmental Issues & Regulation are Risks which Insurers Must Understand
The UN Environmental Program projects that losses from climate change related events could reach $1 trillion annually within 30 years. To deal with this major risk, insurers must recognize it at a strategic level and invest in partnerships and programs to develop the right responses. For example, Allianz has formed a cross-company climate change working group to develop and implement action plans for each of the company’s main branches.
Additionally, as climate laws such as California’s AB 32, cut their regulatory teeth, it is of vital importance that insurers monitor such policies and consider how they will affect business. At this early stage in the game, companies still have an opportunity to participate in shaping these policies; the 21 companies which participate in the UNEP’s insurance work stream are taking an active role in directing future regulation. Laggards, however, risk being assessed by standards they had no part in shaping.
Build Brand Value – Insurers have a Public Mandate to Act as Responsible Community Partners
Customers, whether individual consumers or corporate clients, are a key stakeholder for any business and increasingly they are showing loyalty to brands that stand for responsible environmental practices. Insurers, in particular, stand to benefit from being seen as responsible stewards of the communities and industries in which they operate. Product differentiation can be very difficult in the insurance industry as illustrated by countless television ads instructing viewers how 15 minutes can save you 15% or more on insurance. Establishing your company as the insurer which protects our planet and communities can be the additional element that makes a customer chose your product over the competition.
The insurance industry is incredibly complex and incorporating environmental thinking into strategy is a similarly knotty issue. Addressing this challenge, however, presents an attractive opportunity to the underwriters of a greener society.