The insurance sector examines sustainability


GLOBE-Net, 6 June 2007 – The insurance industry is already making substantial contributions to global sustainability, but major challenges and opportunities lie ahead, according to the inaugural report of the Insurance Working Group of the United Nations Environment Programme Finance.

The Insurance Working Group (IWG) is an alliance of sixteen insurers, reinsurers and brokers from Australia, Bermuda, France, Germany, Greece, Japan, Norway, Spain, Sweden, Switzerland, the Netherlands, the United Kingdom, and the United States, who “œare committed to advancing the principle of sustainability in their operations as an integral part of their corporate responsibility”.

According to the report, members believe that embedding environmental, social and governance (ESG) issues in core processes, products and services is essential for enhancing long-term company value. The group collectively defines this strategic approach as “˜sustainable insurance’ ” a concept consistent with the “˜Triple Bottom Line,’ described as People, Planet and Profit.

The IWG notes that the global insurance industry sits in a pivotal intersection that helps individuals, communities and businesses understand, manage and mitigate risk, and protect their assets. As environmental and wider sustainability challenges become clearer, whether it be climate change, resource depletion, environmental degradation or one of the myriad of other issues humankind faces, the insurance industry performs an increasingly vital role, the report adds. “œA robust insurance industry provides the thorough risk analysis and early warning system that allow informed choices to be made, businesses to prosper, and sustainable livelihoods to be built and flourish.”

However, the group observes that there is not enough understanding of the benefits in engaging in sustainability issues. Sustainability issues are often viewed by the insurance industry with a veil of ambiguity, leading to insufficient and, at times, flawed understanding of the risks. Accordingly, many opportunities remain untapped, the group notes.

Three areas of insurance and sustainability issues “œcry out for greater attention”, says the report:

  • Providing micro-insurance linked to microfinance
  • Researching emerging risks and sharing such knowledge with stakeholders
  • Developing insurance products and services for natural resources

The IWG asserts that climate change is the greatest environmental risk confronting the insurance industry, but it is not the only one. The threats posed by climate change along with other sustainability issues ranging from insurance for the poor, protection of natural resources, emerging risks such as nanotechnology, to health and lifelong income, must be addressed proactively, they argue.

Two types of obstacles to sustainable insurance are identified ” structural barriers that affect the whole financial sector and barriers to insurability.

The main structural barriers are seen as:

  • Misperception ” often, businesses have the preconception that ESG issues are irrelevant, while other parties view the profit motive of businesses as being incompatible with sustainability.
  • Institutional Rigidity ” regulatory frameworks prevent an effective response. Laws may inhibit insurers from issuing innovative products such as derivatives and foreign companies from entering developing countries.
  • Insufficient Capacity ” the private financial sector in developing countries is very weak.
  • Vulnerability ” the worst-affected people are the least able to cope.

The analysis in this report suggests strategies for insurers to implement a campaign of deeper and more proactive engagement in sustainable insurance.

Key strategies to develop sustainable insurance are identified as:

  • Risk Knowledge ” research and analysis are essential. A thorough understanding of the risks involved and how to manage them effectively is critical and may require special projects and the acquisition of new skills.
  • Public-Private Partnerships ” this can be an appropriate model for insuring ESG risks, particularly in developing countries and for catastrophic loss potentials.
  • Information Technology ” this can be employed innovatively to measure risk very accurately. Markets can be segmented and individual risks properly weighted.
  • Partnering for Distribution ” consumers often view insurance as an unpleasant and occasional duty ” even when it relates to savings. If insurers do not have local presence, it is often vital to partner with other organizations that can access clients and earn their trust.
  • Consumer Education ” many consumers are not financially sophisticated. A collaborative program of consumer education can be effective, especially with public sector and NGO partners.

The IWG attempts to introduce these concepts and summarize the current and future potential of the insurance industry to contribute to global sustainability. The report includes an examination of a number of sustainability issues and sectors, with supporting case studies and examples of best practices.

The report should be of interest to those in the insurance industry, public officials, and those with interest in the relationship between risk management and environmental, social and economic sustainability.

This article is reproduced with kind permission of GLOBE-Net,
an initiative of the GLOBE Foundation of Canada.

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