With the release of the UNEP Finance Initiative’s Insurance Working Group inaugural report on sustainability issues in the insurance sector in May 2007 we examine what all organisations can learn from the issues discussed.
The insurance industry has firsthand access to climate change information. The impacts of freak weather events on premiums and payouts place the industry firmly at the pointy end of sustainability.
In order to operate successfully insurers need to quantify and price risk effectively. Failure to do this places the industry at risk, so it is in their interest to develop a sophisticated understanding of the new challenges and opportunities presented by sustainability issues.
Issues identified in the report
The report “Insuring for Sustainability – Why and how the leaders are doing it” identifies nine vital global sustainability issues, based on their urgency, scale and the ability of the insurance industry to influence them:
- Climate change and the impact of increased extreme weather conditions
- The role of microinsurance in reducing social and economic vulnerability
- Lifelong income and meeting the needs of an ageing population
- Health, in particular, the threat of new epidemics including avian bird flu, obesity and stress
- The need to quantify emerging manmade risks including nanotechnology and genetically modified organisms
- Environmental liability
- Attributing a value and risk weighting to natural resources
- Recycling and what to do with items written off in insurance claims
- Internal efficiency to reduce the industry’s footprint and provide an example to customers
How do they affect me and my organisation?
Whilst the report focuses on the insurance industry the issues raised have implications for organisations more generally. Most importantly are the questions:
- Do I have adequate cover?
- Does my provider reward me for future proofing my business against climate change?
- How sustainable is my supply chain? Have they made adequate provisions?
Much of the world’s population is underinsured. Often it is those least likely to rebuild after the storm that are left exposed, leaving the victims to refinance themselves or rely on donor aid as seen after hurricanes in New Orleans and Jamaica.
Whilst this is a major issue in the developing world, developed countries are not immune. In the UK underinsurance is a big issue amongst SMEs. A 2006 survey revealed that up to 90% of SMEs are underinsured with only a third adequately protected against business interruption.
Despite the fact that 85% think climate change is a serious global problem only 26% see it as an issue for their business. Failure to recognise the issues and take action to safeguard against them leaves many businesses unnecessarily exposed.1
Rewards for future proofing
Individual insurance companies are at varying levels of sophistication in their understanding of the impacts of sustainability. If your business has undertaken steps to implement sustainability frameworks and understand the risks and issues then it is important to find an insurer that recognises this and adjusts your premium accordingly.
Many serious risks can be avoided or minimised by a structured review of loss exposures and good contingency planning. For instance, health and workplace safety is an area where a proactive approach can have a dramatic impact on reducing lost time due to injury and compensation payouts and as a result should lead to lower premiums.
As the understanding of the issues grows, there are a number of new products available, particularly in the area of man-made risks and environmental liability. Understanding the issues that most impact your own business will help you safeguard against them appropriately.
Sustainable supply chain
Ever wondered what happened to a damaged fleet vehicle or piece of factory equipment once it has been written off in an insurance claim? The insurer automatically becomes the owner of the scrap.
This means that the insurer has the opportunity to influence how materials are disposed of, recycled or re-used. Whilst this is a relatively new area of focus it is important to find out how your insurer disposes of items once they are written off including what proportion of the materials are recycled.
As already discussed adequate insurance levels remains a big issue. It is important to include your supply chain in business continuity planning for extreme weather conditions. Will they be able to maintain supply? Are they adequately covered themselves? How long would it take for them to become operational again? These are all important questions.
Another emerging issue is that of environmental liability. This includes Environmental Impairment Liability Insurance (EIL) for financial deals with potential historical pollution issues, for instance, covering possible escalation costs of regenerating a former industrial site for social housing.
The report makes note of so called Tiger countries , including India, Indonesia, Malaysia, Thailand, Singapore, China, Indochina and the Philippines where public policy on issues such as pollution and the use of toxic chemicals can be lagging. Organisations relying on Asian supply chains are encouraged to invest in training and technical support if they want to be assured of responsible procurement with vendors.
Public private partnerships – we all have a role to play
It’s hardly surprising that the report also calls for a combined effort in creating a more sustainable world. Leaders in the insurance industry have identified their role in helping individuals and organisations rapidly recover from new potential disasters we face as well as educating us to help avoid them or at least minimise the impact.
In addition is the role insurance can play in freeing people for greater risk-taking behaviour thereby fostering innovation and entrepreneurial behaviour that can help develop solutions.
The report calls for a public private partnership approach to the sharing of information. Of paramount importance is the need for sound regulatory frameworks and the need for politicians to govern in a way that physical, environmental and social risks such as climate change and crime do not spiral out of control and become uninsurable.
Within a stable and proactive regulatory environment, leaders within the industry recognise its ability to provide additional research, support and guidance to help customers manage and safeguard against climate change.
“Insuring for Sustainability – Why and how the leaders are doing it", 2007 report, UNEP Finance Initiative website.
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