Why Insurers Need to Act on Sustainability
We talk about climate change a lot these days. It seems like we’re regularly bombarded with news or data from recent studies that shed light on the concerning state of affairs in which we find ourselves. More worrying still is that there are some legislators who deny its existence – or at the very least, it’s importance. But that’s a conversation for another time. What’s clear is that the insurance industry is already feeling the effects of extreme weather. Carriers regularly lose over $100 billion annually as a result of natural disasters – having never exceeded $50 billion prior to 2005 – which poses a huge threat to the industry as a whole. Insurers need to act now. And fast. There are, however, reasons for optimism. Technology providers arise with exceptional regularity these days which will provide opportunities for new partnerships and solutions to a huge challenge for insurance and wider society. If the traditional carriers can effectively leverage new technologies and partners as well as allocate capital strategically in other areas, the benefits can be massive.
Flexibility is going to be key for insurers as they start working to improve their sustainability measures. Climate risks are constantly evolving so creating static products is no longer fit for purpose and the industry as a whole has to collaborate for success. Agile business models combined with malleable insurance products will be key as new climate risks emerge. While the appetite exists to become more sustainability, insurers alone cannot solve the global climate crisis and the part they can play can’t be done in isolation. Partnerships will be arguably the number one tactic in this war. For example, parametric solutions are on the rise and are a great place to start. Those companies are better at using tech and they’ve often been created with the singular goal of making the world a greener, safer place. It would be foolish not to take advantage of them.
As we all know, the modern insurance game is no longer about promising to pay. In many instances, insurers have started to look to prevent rather than simply pay out a claim and there’s no reason this can’t be achieved for sustainability purposes. Of course, it’s probably a clearer task to help people live healthier lives as is the case with companies such as Yulife or Vitality, but insurers need to focus on helping their customers be more sustainable. Furthermore, there is a protection gap that needs closing. The UK saw forest fires last Summer during the heatwave and in the floods that affected parts of Europe, some thirty percent of affected parties were uninsured. The following can never be repeated enough: if there are no assets to insure, there is no insurance industry. We need to take note of this and take control of what we can.
While flexibility is important insurers also need to think about where they allocate their capital and time in other parts of their businesses. Some insurers have continued to take on fossil fuel projects which are still fundamentally necessary as we can’t simply divest from fossil fuels overnight and expect the world to function. However, there has to be increased focus on underwriting green projects, technologies and solutions to further its cause – there are many insurers who have engaged in these initiatives but we can’t stop now. Let’s not forget about the need to allocate reserve capital either. Insurers need to think about where to sustainably invest to increase their portfolio of assets which will further the worldwide sustainability cause and provide long-term revenue for loss reserves.
The final piece of the puzzle is the social element. Consumers from all ages and geographies are becoming steadily more aware of and concerned about climate change and they now expect all companies to come up with effective sustainability issues – and they can see right through any objectives which appear to be “virtue signalling”. This could impact insurers in two key areas. Firstly, if customers can’t see insurers playing an active role in reducing carbon emissions and working with sustainable partners, they are becoming less likely to purchase insurance from them. The second is that talented individuals that the industry should seek to attract will shun those businesses who aren’t taking steps to reduce and/or mitigate their carbon footprint. So if insurers can act quickly, it will have a knock on effect of improving customer acquisition, retention and satisfaction while having a similar effect on talent.
It would be simplistic to label sustainability as a mere challenge. Of course there are risks, however within risk comes opportunity and in the insurance industry’s case, the opportunity to both “do the right thing” as well as create new revenue streams and build out what is currently a relatively fledgling customer base. What’s more, they can find ways of improving customer service at a time when many consumers don’t believe that large corporations will take heed of their desires. But it’s not a hypothetical anymore. It’s an imperative.