Articles - Making insurance sustainable

 By James Wallace, RSA Group Head of Corporate Responsibility

 Insurance is based on the fundamental principle of protecting risk and for many years the industry has been helping customers to manage against it. Insurers are always looking for ways to manage new and emerging risks and, in recent times, the issue of changing environment has been given top billing by many in the industry. As insurers have seen an increase in weather related claims, sustainability is rising up the agenda.

 Sustainable development is loosely defined as not using more resources than the environment is able to sustain. It is about trying to achieve a balance, or as close to a balance as possible, between economic growth, environmental protection and an equitable society. It stresses that poorly managed short-term economic gain can have negative impacts on the environment and society, ultimately reducing long-term economic benefits.

 So why does sustainability resonate with insurers? The industry is always concerned with the impacts of weather on its customers. Any changes in intensity or frequency of weather patterns are a cause for concern. Whether it is flooding, wind damage, cold weather, subsidence, drought or just an increase in precipitation – they can all lead to insurable losses. As insurers we will continue to respond to natural variability in weather and help customers when in need, but as a business the industry needs to look at how to mitigate certain risks.

 Understanding risk

 While the debate over climate change continues to rage, the majority of scientists believe it is highly probable that man-made emissions are contributing to a changing climate. With levels of natural catastrophes hitting record levels last year it is still difficult to state with any certainty if they were climate change driven.
 Nevertheless, consideration is being given to the potential long-term risks of climate change. The industry is considering rising sea levels affecting low lying land, warmer seas affecting marine species behaviour, potential shifts in agricultural cultivation patterns and even new stresses on building material composition. These major global trends are something that the reinsurance industry is looking at in more detail. For insurers, it is extremely hard for them to price these risks into products or define a specific, immediate risk that a client would be actively looking to buy cover for.

 Making it relevant

 The challenge for insurers is to make sustainability relevant to the customer. There is a tendency to assume it is about developing “green” products, usually to personal lines customers. Customers are obviously interested in quality insurance at an affordable price. If the insurance offered is environmentally beneficial then that is an extra benefit to the customer, but not a key driver in the customer’s decision making. This is why it is important to approach each line of business differently and understand where sustainability has a relevance to the insured risk whether looking at shipping, property, construction or renewable energy. When assessing your core customer offering, considering whether sustainability can help reduce insured risk or offer a competitive advantage can help make it relevant.

 RSA has found that while it is challenging, it is still possible to make sustainability relevant to insurance. This is why we work with the leading environmental charity, WWF. Combining its environmental expertise with our industry knowledge, the partnership allows us to understand and focus on where insured risk and environmental risk overlap. This working relationship highlights where good risk management practice can actually make a difference to premiums and claims and bring benefits to our customers and our business.
 An example of our partnership in action is the launch of our first joint aquaculture guide for customers later this year in June. WWF helped to establish the Aquaculture Stewardship Council, a certification standard for fish farms to achieve better management against negative environmental impacts. Using this expertise and understanding, we, along with WWF, are releasing a series of guides that provide information to our customers on issues such as reducing disease by improving the conditions in which farmed fish stock are kept, and maintaining equipment to prevent escapes and breeding with native species. The guides demonstrate a practical approach of working with customers to reduce risk, while at the same time demonstrating a clear example of where environmental sustainability can lead to economic benefits for both customers and insurers.
 Spotlight on sustainability

 A few insurers have been leading the way when it comes to sustainable development, but now the industry as a whole is starting to pay attention. This is in part to do with the work of the United Nations (UN) Environment Programme. Already the UN has helped both the banking and investment sectors, developing high level guidelines to help the industries work towards sustainability, and now it’s the insurance sector’s turn.
 Since 2007, hundreds of insurers and national insurance associations, along with brokers and reinsurers across the globe, have been involved in developing a set of principles which help to define a sustainability framework for the industry. The guidelines will be launched in June at the Earth Summit, the Sustainable Development conference held in Rio De Janiero. The principles will focus on incorporating environmental, social and governance factors into industry practice, as well as a commitment to report annually on progress the industry is making in sustainable development.

 While most of the large insurers already report on many of the aspects outlined in the guidelines, it is hoped that the principles will serve as a framework for insurers and national insurance associations who are just starting on their journey of understanding what sustainability is and how it is relevant to their businesses. It is through this industry collaboration that achieving sustainable development that is relevant to both insurer and customer will be made possible.

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