According to Lybra, businesses in the Insurance Industry that integrate sustainability within their core strategies and operations reap numerous benefits. They improve operational efficiency, optimize resources, reduce waste, gain a competitive edge, and enhance financial performance. Or attract and retain top talent and improve their reputation by committing to sustainability.
Sharing, or pooling, of risk, is the central concept of the daily business in the insurance industry. The idea has the beauty of simplicity combined with practicality. If risks—chances of loss—can be divided among many members of a group, then they need to fall lightly on any single member of the group. Thus, misfortunes that could be crushing to one can be made bearable for all.
Viewed as a form of mutual aid, risk-sharing can be seen not only as sound business practice but as enlightened social behavior rooted in accepted principles of ethics. The idea and the practice of risk-sharing originated in antiquity. Thousands of years have elapsed since Chinese merchants devised an ingenious way of protecting themselves against the chance of financial ruin.
Or rather, avoid an upset in the treacherous river rapids along their trade routes. They divided their cargo among several boats. No merchant lost all his goods if one of the boats was battered in the rapids. Each stood to lose only a tiny portion. They may not have thought of their scheme as insurance. Still, the principle is remarkably similar to that of its modern counterparts.
Understand The Uprising Journey Toward The Modern Insurance Industry
With the evolution of the modern insurance industry, rather than distributing cargo among several ships, merchants, and shipowners find it more convenient to spread the monetary costs of any losses among many merchants and shipowners through financial agreements. Again, these agreements usually take the form of an insurance policy for the convenience of all parties.
In particular, they do so with insurance underwriters or an insurance company acting as a financial intermediary. In return for a premium payment, the insurer assumes the risks—that is, obligates itself to pay the losses—of all the policyholders. Insurance underwriting got its name from the practice, in 17th century England, of private investors signing their names as guarantors.
In the New World, the first fire insurance firm was formed in 1735 but lasted a scant five years. Benjamin Franklin got fire insurance off to its actual start—in 1752—with the successful formation of the Philadelphia Contributions for House Insurance. Insurance wasn’t far behind when the automobile came along—to provide car owners financial protection and peace of mind.
Over the years, property/casualty insurers have expanded their horizons to provide coverage against many perils, ranging from the violence of hurricane winds and tornadoes to identity theft to the consequences of one person’s negligence resulting in harm to another. And repeatedly, insurers have found a way to deal with advancing technology’s highly specialized insurance demands.
The Main Insurance Industry Functions
Our society could hardly function without insurance. There would be so much uncertainty and exposure to sudden, unexpected, possibly catastrophic loss that it would be difficult for anyone to plan confidently for the future. Most importantly, it would be difficult to obtain credit or financing since few lenders or investors would be willing to risk funds without guaranteeing safety for their investments.
Sustainability is no longer a complementary feature of a company’s value proposition but a need that must be integrated into the core of its business model to ensure long-term success and viability. Megatrends like increased connectivity and mobility, climate change, the depletion of natural resources, and rapid urbanization define the reality in which organizations operate.
Stakeholders, including consumers, investors, employees, and society in general, demand companies go beyond mere compliance with legal requirements and instead have a positive impact that reflects a steadfast commitment to sustainability leadership. This requires an active contribution to the UN SDGs and a journey toward value creation across the business model.
Insurance Industry Purpose
Technically, property/ casualty insurance’s primary function is the risk transfer. It aims to reduce financial uncertainty and make accidental loss manageable. It does this by substituting payment of a minor, known fee—an insurance premium—to a professional insurer in exchange for the assumption of the risk of a significant loss and a promise to pay in the event of such a loss.
Sustainability Solutions must be able to reduce risks and negative impacts and increase their value to society. Such Sustainability Solutions are based on leading sustainable practices and expertise in supporting companies in all sectors worldwide. Sustainability leadership is usually based on a solid commitment to creating value for stakeholders and broader society.
Spreading The Risk
Transfer of risk is also referred to as “spreading the risk:’ because the enormous losses of a few are distributed through an insurer to a large number of premium payers, each of whom pays a relatively small amount. The larger the number of premium payers, the more accurately insurers can estimate probable losses, thus calculating the amount of premium to be collected from each. Because loss incidence may change, insurers constantly manage loss “experience” as a basis for periodic reviews of premium needs.
The Societal Benefits
As an additional benefit to society, insurers, the trustees of policyholder and stockholder funds, become significant investors and suppliers of capital to the economy. In this respect, insurers perform a capital formation function similar to that of banks. Thus, business enterprises obtain a double benefit from insurance—they are enabled to operate by transferring potentially crippling risk, and they also may get capital funds from insurers through the sale of stocks and bonds, for example, in which insurers invest funds. Consumers benefit through the availability of many products and services and the economy from the hundreds of thousands of jobs created within the insurance industry or supported by it.
Why The Insurance Industry Ought To Change Sustainability Goal Tacks
The insurance industry continues to bear the brunt of climate change and other sustainability-related risks. According to Aon’s 2021 Weather, Climate, and Catastrophe Insight, it is estimated that the global losses associated with climate-aggravated catastrophes reached $130 billion in 2021 and have been growing over the last couple of years. Liability claims are also increasing.
Notwithstanding, they arise from proceedings for failures in mitigation and adaptation, greenwashing, disclosure, negligence, and human rights issues. Today, an active commitment to sustainability is expected to be at the center of your organization’s value proposition and integrated into all operational and financial business models. There are a few solutions to note.
Sustainable:
- Business Practices
- Energy Sources
- Infrastructure Systems
- Lifestyle Environment
- Production Opportunities
- Natural Resources
On the other hand, the industry gains from opportunities presented by sustainability and climate risks by developing products that enable customers to adapt to and mitigate these risks. It’s one of the biggest sustainability beneficiaries. A prosperous society free of disease, hunger, and other social ills means more disposable incomes, increased uptake of insurance products, and lower claim losses.
Therefore, the insurance industry should be motivated to be at the forefront in mitigating and adapting to climate and sustainability risks. Unfortunately, for a long time, the insurer has more often than not come to pick up losses after the loss event has crystallized. Not much progress has been made in mitigating and adapting risks. How can the industry drive sustainability?
1. Implement A Workable Pricing
Insurers would ordinarily re-price risks upon renewal to cover increased losses. This approach may not work for climate risks as their effects can be systemic, likely causing market failures that can threaten business models and make the insuring process have some risks uneconomically for insurers and unaffordable for customers.
2. Push For Sustainable Financing
While considerable progress has been made globally since the UNEP-FI Principles of Sustainable Insurance launch in 2012, not much progress has been made amongst local insurers, with only a handful talking about sustainability, let alone integrating it into strategy and operations. The counterparts in the banking industry embraced sustainable finance practices in 2015 when they launched the Sustainable Finance Initiative and have made considerable strides, the most recent being the launch of the Guidance on Climate-Related Risk Management by the Central Bank of Kenya in 2021.
3. Advocate For Behavior Change
One might be tempted to argue that the insurance industry and the essential humanitarian-based cover business contribution to climate change are negligible when compared to entities in manufacturing and the fossil fuel-intensive sectors. While this may be true to the extent of the industry’s immediate boundaries, looking at the wider boundary, the sector can contribute to mitigating climate and sustainability risks by driving behavior change amongst its customers and stakeholders.
4. Work Closely With Partners
In this case, sustainability can be achieved by including Environmental, Social, and Governance (ESG) criteria in product development, underwriting, and claims process. It could mean pricing products to encourage positive behavior toward the environment and society. A good example would be discounting premiums for work injury benefit insurance for organizations implementing health and safety safeguards at the workplace or charging lower premiums for insuring electric vehicles than for petrol and diesel-powered vehicles.
5. Adopt Innovative Eco-Products
At the same time, the industry can also drive sustainability by developing innovative products that help adapt and mitigate climate risks and products that promote economic, environmental, and social sustainability. One sector in dire need of support from the industry is agriculture, which has yearly suffered losses from the effects of climate change on weather patterns. Unfortunately, the insurance industry has not fully embraced agriculture insurance due to its perceived unprofitability. There are, however, cases of success stories by some agricultural insurers, which point to the possibility of success on a broader scale and with better collaboration among industry players, the government, and other stakeholders.
How The Insurance Industry Can Progress On This Front
Regarding the role of the Insurance Industry in helping mitigate the effects of weather patterns and climate change, the UNEP-FI Principles for Sustainable Insurance (PSI) offer a good starting point for insurance companies keen to integrate ESG into their strategy and operations. Launched in 2012, the principles provide a roadmap for embedding decision-making in their plans.
It also fosters environmental, social, and governance issues relevant to the insurance business. Likewise, it encourages collaboration with clients and business partners to raise awareness on environmental, social, and governance issues, manage risks, and develop solutions. In addition, they also seek to encourage collaboration with governments, regulators, and other key stakeholders.
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In particular, they are adept at promoting widespread societal action on environmental, social, and governance issues. Sustainability must be embedded in our culture and the way we do business. We must use our scale and expertise to create a more responsible, balanced, and sustainable future. Sustainability Solutions are a wide range of services that help organizations comply amicably.
This includes finding strategic methods to implement better and more efficient processes, address stakeholder concerns, manage risks, and accomplish their sustainability goals. No matter the level of maturity of an organization’s sustainability journey, Sustainability Solutions must offer multiple integrated options to improve environmental, social, and governance performance.
Takeaway:
We live in a complex world where megatrends are increasingly shaping consumer and company behavior. Companies of all sizes face a growing social and regulatory focus on climate, natural resources, health and wellness, responsible consumption, and sustainable urbanization. Today, businesses must commit to adding societal value through global outreach and expertise.
The aim is to create a positive impact beyond organizations and accompany clients on their sustainability journeys, whatever their level of maturity in this process. Organizations must integrate solutions across functions to help customers maximize financial value and improve efficiency. They must offer the ability to deliver quantifiable value by facilitating sustainability outcomes.
In particular, by focusing on environmental, social, and economic domains. This approach allows for coherent, integrated, and ready-to-activate services selected to help clients reach their sustainability targets. Insurance Regulators across the globe are increasingly focusing on sustainability and climate risks and are integrating these risks into macro and micro-prudential guides.
The Insurance Regulatory Authority has also started engagements with the leading insurance industry stakeholders and shareholders. We expect that the IRA will soon adopt this effective futuristic route. Therefore, the insurance industry should brace for this imminent but exciting change. With that in mind, please let us know what you think the insurance industry can do more.
