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Partha Radhakrishnan

Sustainability in Insurance: Weighing possibilities and responsibilities
Partha Radhakrishnan Senior Vice President, Financial Services | March 23, 2021
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The financial services industry plays a key role in the transition to a more sustainable planet. In addition to managing the impact of their individual businesses, global financial services can accomplish much more than any other industry. They can integrate long-term environmental, social, and governance (ESG) criteria to global business and investments, and put purpose over profit. The global financial services industry has actively started to embrace the sustainability agenda in the past couple of years. Global Investment in sustainability has also gained momentum in 2019, with investors around the world allocating a whopping USD 89 billion for global sustainability-oriented funds.

The Financial Services industry can accomplish much more than any other industry, integrate long-term Environmental Social and Governance (ESG) criteria into global business and investments, and put Purpose over Profit.

These figures hint that a lot of capital has flown in the theme of sustainable development over the years. An equally large amount of funds have also been directed toward our resource-inefficient and carbon-intensive economy. Despite the progress made in sustainability by the global financial industry, communities and economies are still susceptible to climate change-related adversities and natural disasters.

It is therefore imperative that the industry transition faster to a new global growth model. The role of the global financial services industry in revisiting its overall sustainability agenda and contributing holistically toward a sustainable economy has now assumed added importance and priority.

Sustainability and the Insurance Industry

The impact of climate change on insurers, in particular, can be measured in hundreds of billions of dollars. The recent surge in global catastrophes and the associated growth in insurance claims have made a substantial dent in the insurance industry as well.

There is a huge downside of managing a growing number of risks. But the potential for premium growth is tremendous, if the insurance industry rides the sustainable development curve.

The Insurance Council of Australia estimates more than USD 260 million (AUD 375 million) in damages from the deadly Australian bushfires of 2020 with an estimated total property insurance market loss of approximately USD 1.045 billion (AUD 1,568 million). In 2018, there was no single major disaster (like Hurricane Katrina in 2005). But economic losses from catastrophes totaled a staggering USD 155 billion, activating USD 76 billion in insurance payout. These astronomically high insurance payouts have squarely put the onus of taking appropriate action in the domain of sustainability, in the insurance industry.

The Way Forward

Insurers are uniquely positioned to change the status quo and have recently taken some concrete steps in this direction. A large multinational insurer has partnered with an insurtech firm to help small farmers in Sri Lanka with a blockchain-based insurance platform. With this, they plan to deliver micro-insurance for the paddy field farmers that are at the risk of crop loss due to extreme weather conditions. Another Europe-based multinational insurer offers sustainable solutions for its retail customers. Special discounts on car insurance - for drivers with fuel-efficient and electric vehicles, on property insurance— for roof-mounted solar panels, and investment products that allow customers to invest their money in funds, which support sustainable solutions. Some other global insurance groups have even resolved to stop or restrict insurance coverage for unsustainable businesses like the coal industry. In fact, 17 of the largest insurers have announced coal exit policies so far.

Elsewhere, the third session at the UNEP’s Principles for Sustainable Insurance Initiatives series threw up a discussion on the industry’s contribution toward the UN’s Sustainable Development Goals (SDGs). Insurers were urged to adopt ‘impact underwriting’ that not only promotes sustainable underwriting practices but also generates higher revenue in an expanding market.

Another dimension that has an impact on sustainability is digitization— in the form of mobile networks, e-wallets, mobile banking, and microfinance, etc. This wave is helping insurers meet their target SDGs by extending the reach of insurance to underserved markets. Digitization has assisted in providing more affordable products while reducing overall inequality.

Insurance companies as good corporate citizens can shape the market’s competitive environment and the community as a whole, increase their own long-term sustainability and profitability. A few examples of the CSR initiatives of a Fortune 200 US-based insurer are listed below:

  • Recycling– Using green reusable containers reduces plastic consumption
  • Commuting– Vanpool program providing reliable, affordable, and environmentally friendly transport options
  • Going paperless– Reduction in paper consumption and overall expenses by opting for ‘online only’ documentation
  • Water saving– Recycling water, helping them save over 130 million gallons annually
  • Energy efficiency– Energy-star certified office building- awarded by the US environmental protection agency

It is clear that the strategic objective must be to engage employees, clients, stakeholders, and communities by incorporating sustainability principles into corporate strategy, culture, and daily operations. Guided by the United Nations Sustainable Development Goals, we must focus on the impact areas of health, education, technology, jobs, and underprivileged people. The approach must encompass economic, social, and environmental sustainability, known better as profit, people, and the planet, respectively. This is a goal that organizations should aspire to carry across every aspect of the business.

Going forward, insurers will have to work closely with public institutions, the federal government, and municipal bodies to develop a climate risk-resilient infrastructure. They must encourage them to embrace more proactive disaster protection measures. The good news is that the industry has acknowledged and imbibed the importance of sustainability. As such, several steps are being taken and the journey toward a more sustainable future has just begun. As they say, sustainability takes forever and that’s the point.