Background on Insurance and Sustainability

Sustainability, in a general sense, is the overall capacity to maintain a certain process or state indefinitely. The issue of sustainability and human activity surfaced in the 1980's as developing countries began to experience adverse long-term consequences from short-term gains in their development. The Brundtland Commission coined the term sustainable development to mean "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." The field of sustainable development can be conceptually broken into three constituent parts: environmental sustainability, economic sustainability and sociopolitical sustainability. The Dow Jones publishes a Sustainability Index of businesses based these criteria. James Strong, Chairman and CEO of Insurance Australia Group , stated "there is one central consideration for our shareholders in fully understanding why business must engage in sustainability. Simply put, no business will survive unless it takes into consideration the community in which it operates, delivers consistent value to customers, maintains the highest standards of governance and ethics, and mitigates its overall impact on the environment."

The concept of sustainability is embedded in the insurance business through the practice of risk management and underwriting. The core function of insurance - to transfer risk - entails that the insurance industry plays a critical role in mitigating the adverse economic, social and environmental consequences of financial losses arising from fortuitous events. The vast interrelationship of global risk is depicted in a matrix developed by XL Insurance and presented in an article on People, Profits and the Planet.

A recent article in Mother Jones included a glossary of new Sustainability terms.

Sustainability and risk management was studied by Dr. Dan Anderson, Ph.D, CPCU, Professor of Risk Management and Insurance at the University of Wisconsin. In his book entitled, Corporate Survival: The Critical Importance of Sustainability Risk Management, he coined the term “sustainability risk management” to mean risk management dealing with risks emanating from the environmental and social justice areas. Dr. Anderson presents a rationale for the role of insurance in the sustainability solution in the CPCU Journal Article below.

According to a 2007 United Nations Report entitled Insuring for Sustainability, sustainability should be an integral part of everything that we do. The U.N. Insurance Working Group (IWG) members identified nine global sustainability issues that are vital for this generation of insurers to consider due to their urgency, the scale of their potential impacts and the integral role that the insurance industry can play in dealing with them:

1. Climate Change

2. Microinsurance

3. Lifelong Income

4. Health

5. Emerging Manmade Risks

6. Environmental Liability

7. Natural Resources

8. Recycling

9. Internal Efficiency

The interaction among these issues is described in detail in the U.N. report:

In a 2005 article, One Report writer William Baue reported on a summit of insurance industry executives representing over 30 companies, regulators, institutional investors, and environmental groups gathered to discuss sustainability and insurance and to search for common interests.

The summit's keynote address was delivered by Jacques Dubois, chair of the U.S. arm of reinsurer Swiss Re, which has garnered the reputation as a leader on sustainability through sponsorship of joint studies such as the United Nations Development Programme (UNDP) and the Harvard Medical School Center for Health and the Global Environment study entitled Climate Change Futures: Health, Ecological and Economic Dimensions. Swiss Re also co-sponsored the production of a film on climate change that aired in 2004 in Canada as The Great Warming and later aired in the U.S. on Public Broadcasting System (PBS) stations as Global Warming: The Signs and The Science.

The following link on the Allianz website contains links to a number of publications on the issue of sustainability

http://www.allianz.com/en/allianz_group/sustainability/studies/index.html

Why Insurance Companies Should Care About Sustainability Issues

"Sustainability is not just a nice-to-have for Swiss Re. Unsustainable trends threaten resources and potentially augment losses, which is why we foster the principles of sustainability with all our stakeholders."

Authors of the 2004 WestLB Equity Markets paper entitled, Insurance and Sustainability-Playing with Fire, give this reason for insurer involvement: "Given the dual role of insurance companies as investment vehicles and fiduciaries, their duty to take sustainability into account is particularly acute. The unique position that the insurance sector has in terms of sustainability topics is also revealed in insurers’ balance sheets, as both assets and liabilities are affected in interdependent ways. Thus, the leverage insurance companies stand to gain by incorporating sustainability topics is considerable."

In a July 2008 conference, the Casualty Actuarial Society noted that sustainabilty and climate risks are challenging for insurers to price.

A Business Insurance article addressed the motivation for why insurance organizations are now looking at green initiatives.

What Insurance Organizations Are Doing

The 2007 UN Report Insuring For Sustainability mentioned earlier features a number of examples of ways in which insurers are taking action on sustainability issues. Intitiatves vary greatly but the nexus for most of the initiatives is corporate responsibility. This is demonstrated in a number of ways.

For example, Swiss Re assesses its corporate clients' performance on ESG issues before issuing director and officer (D&O) insurance. This assessment focuses on climate change risk management by examining companys' responses to the Carbon Disclosure Project (CDP), which surveys how Financial Times 500 (FT500) companies handle emissions of greenhouse gases (GHG), the primary culprits of global warming.

"If the answers from our perspective are not sufficient, we talk to these clients and ask them additional questions," said Mr. Menzinger in an article on one-report.com.

"Sustainability performance is a good proxy for risk management," Mr. Menzinger told SocialFunds.com. "Every year, we have our own risk engineers comprehensively screen about 20 percent of our corporate clients, with environmental, social, and governance as part of that screening."

If a company is assessed to be doing particularly well on their environmental, social, and governance (ESG) performance, then their premium would more likely go down, according to Mr. Menzinger. On the other hand, if the assessment shows they are a higher risk because they are not doing as good a job on their ESG issues, then it is more likely their premium would go up.

"We started to include sustainability performance of our clients who are banks, assessing how they deal with sustainability, and depending on the outcome, we have less complicated or more complicated procedures in terms of accepting certain pieces of business," explained Mr. Menzinger. "A leading sustainability performance track record alleviates us from investigating certain controversial activities."

"We are guided by our Group Code of Conduct where we have embedded our commitment to sustainability, which states that we prefer to do business with other companies that share beliefs and values," said Mr. Menzinger.

An article in Business Insurance suggests that insurers need to do more to boost Green energy

.

.

Greening of Insurance

While climate change poses potential threats to the insurance industry, it also offers enormous opportunities for innovation. Just as insurers historicallly had a constructive role in founding the first fire departments, building codes, and vehicle safety testing, they have now an opportunity to develop creative products and services to minimize the causes and effects of climate change.

As of 2007, this website and the associated reports document 422 examples from 190 insurance companies, brokers, and organizations in 26 countries. Dr. Evan Mills at the University of California, has published a number of books and articles on insurance and sustainability.

Another space where insurers are addressing sustainability is in product development. This has been especially prevalent with respect to property insurance. An AAIS article describes the different ways many companies are offering green property products..

.

*For example, FM Global, a large Commercial Insurer, recently filed for approval of a Green Endorsement, which will replace any damage with environment-friendly material and recycle the damaged sections for an additional premium. The premium was developed after studying the costs of green construction versus that of standard construction. Effective Date September 16, 2008. (COMPANY FILING NUMBER AFFILIATED FM INSURANCE COMPANY FMGL-125739681 Mississippi ).

*Mutual Boiler Re introduced a "green" equipment breakdown coverage which pays costs such as repairing or replacing damaged property with green alternatives, hiring accredited green consultants to assist with green design and replacement; certification or recertification by recognized 'green" authorities; green removal, disposal, and recycling of damaged property, and business interruption associated with green activities.

Lexington, an AIG company. has an edorsement that permits insureds to "Upgrade to Green" following a loss..

*Ace INA Insurance offers green products. http://www.acegreen.com/products ranging from environmental loss control services to products that deal with reducing the financial risk of uncertain weather.

*DOMANI Sustainability Consulting, an executive management consultancy, and Garnet Captive Insurance Services, a designer of alternative insurance programs, have an alliance to create a captive insurance program designed exclusively for companies that are committed to sustainable business practices (i.e., purchase or generate energy from renewable sources; implement energy efficiency best practices; set targets for reducing environmental, etc.)

.Liberty Mutual has intitiatives related to green building endorsements. The following described this in Risk and Insurance magazine

The below Case Study is part of a continuing series designed to highlight key products and services to our readers. This paid-for Case Study was written and edited by Risk & Insurance® on behalf of our marketing partner. Additional Case Studies can be found on our Web site at www.riskandinsurance.com/casestudies.
Building Green Makes Sense in Any Economy Despite today’s troubled economy, the trend toward green commercial building continues to move forward. According to the 2008 Green Survey: Existing Buildings, funded by the U.S. Green Building Council (USGBC), Incisive Media and the Building Owners and Managers Association, more than 80 percent of commercial building owners have allocated funds for green initiatives in 2009. Green buildings are designed to be more efficient in their use of energy, water and other resources and to create better working environments for their occupants. Despite the current economic environment and some perceived obstacles to green building, the benefits remain significant. In addition to reducing energy costs and improving the health and well-being of occupants, green buildings have lower operating costs, higher building values and higher occupancy rates, notes Ann Butterworth, director of property underwriting at Boston-based Liberty Mutual Property. Green builders may also be able to take advantage of continued government incentives, such as tax breaks and abatements. Even if a company is not yet going green, it can still benefit from green insurance coverage. In many cases, current insurance won’t cover the use of green materials if those products are priced higher than non-green materials unless the property owner has an endorsement to cover that risk. “If you think you’ll be incorporating green materials, especially after a loss, you should look into the available coverage options,” says Butterworth.
There are two key certification organizations available for property owners looking to begin the green process. The U.S. Green Building Council’s LEED® (Leadership in Energy and Environmental Design) program and the Green Building Initiative’s Green Globes program provide third-party, independent, international certification of green building projects. While the cost of certification has often been cited as an obstacle to building green, many believe the return on investment far outweighs the initial costs.
“We’re seeing more companies getting involved in the green movement,” says Lucas Pfannenstiel, account engineer at Liberty Mutual Property. “While most state and local building codes don’t yet address green construction, we’re seeing interest in the development of a common standard that will make the process much easier to undertake.” Liberty Mutual Property recently introduced a collection of new commercial property coverages designed for business owners interested in undertaking green building ventures. Liberty Mutual’s Green Select™ property policy endorsement was designed to give customers the coverage flexibility necessary to best protect their green investments. In the event of a loss to a LEED or Green Globes certified building, the policy would pay for the costs involved in upgrading to green-certified building products, the fees necessary to achieve the next level higher of certification, debris recycling, vegetative roofing systems and recommissioning costs. In addition, the policy would pay for a delay in operations if, after a loss, the upgrade or rebuilding of a green property took longer. “Many insureds and prospects are asking, ‘do you have a green endorsement,’” says Butterworth. “A number of clients have come to us because we have this endorsement, even though they don’t yet have green buildings to cover,” she notes. The demand for green building is currently outweighing the initial costs and concerns about yet-unknown risks. Because many construction materials and green building techniques are relatively new, there is concern as to whether the materials will work as promised. Butterworth cautions about “greenwashing” – a play off the expression “white washing” – when consumers are potentially conned into incorporating so called “green materials” that do not meet certain standards. “We encourage people to make sure the products being used are verified, validated and recommended for use by a reputable third-party certification and testing organization. We believe that commercial property owners who develop a practice of a systematic and collaborative design process throughout the green building project might ease some of the property, contractors’ and general liability coverage issues,” stresses Butterworth. While the cost of using green products may initially be higher, green buildings are expected to provide less exposure to loss over the long term. “We work with experienced contractors and engineers who are aware of the new electrical, plumbing and HVAC systems and regulations,” says Pfannenstiel. “We believe there will be less exposure and risk down the line due to the state-of-the-art equipment being used. We also value our relationships with risk managers and building owners who look for preventive measures and quality, who see green buildings as an advantage and who are actively looking to reduce their risk.” Because the green building industry is so new, Liberty Mutual is continuing to do as much research as possible to collect data on the pros, and possibly cons, of going green. “We’re gathering as many resources as we can to stay on top of the green movement,” says Pfannenstiel. “Our goal is to help our insureds understand the coverage and insurance issues, as well as the technical issues involved in green processes and green systems.” It’s a work in progress, stresses Butterworth. “We want to make sure we’re meeting the developing needs of our insureds while helping them understand the benefits of going green and, along the way, reassure them that their insurance coverage will protect them, should a loss occur.” Insurers urged to do their part for social good at AIRMIC Posted On: Jun. 16, 2009 10:56 AM CST Stuart Collins BOURNEMOUTH, England—Insurers should offer greener businesses lower insurance premiums and adapt their products to encourage good corporate behavior, says the chief operating officer of the corporate risk unit of Aon Corp. Speaking at the Assn. of Insurance and Risk Manager’s conference in Bournemouth, England, Andrew Tunnicliffe, chief operating officer of Aon Global Risk Consulting, said insurers have an important role in promoting good corporate citizenship by creating “influential insurance” products at reduced premiums or with green policy terms. “The insurance industry has the power to influence and create a greener society,” he said. Green insurance products could include reduced premiums and enhanced coverage for buildings constructed to withstand extreme weather events; pollution legal liability and remediation cover; specialist insurance for renewable energy projects; and health insurance products that reward healthy lifestyles, he said. “Embedding corporate social responsibility principles at the beginning of insurance product development has to become part of the way we work to support global businesses. Looking at where we can reduce premiums to encourage green technology or renewable power generation are just some examples of how we can implement CSR as part of our businesses.”

.

Other Examples:

* Offering insurance discounts on hybrid cars.

* Participating in Climate Leadership Council.

* Agreeing to purchase clean, emission-free wind energy credits and seeking to become carbon-neutral.

* Establishing Environmentally Friendly Practices and Being Environmentally Responsible.

Other Examples of Actions Related To Sustainability

Publishing reports and alerting the proper authorities about public dangers such as dangerous intersections and potentiallly dangerous products.

* Supporting organizations such as The Insurance Institute for Highway Safety which analyzes insurer data to help prevent losses.

* Providing information and financial incentives for safe behavior that reduces risks in society.

.

Climate Risk and Insurance Sustainability

"Perhaps no other industry is more exposed to the financial risks of climate change than the insurance industry", says Eileen Claussen, president of the Pew Center on Global Climate Change. "But the unique risks faced by the industry also present it with an opportunity to take a leadership role in responding to the climate challenge."

The rationale for the industry's involvement in helping to mitigate risks from climate change is set forth in the introduction of the Swiss Re report report which states, "Today, global warming is a fact. The climate has changed: visibly, tangibly, measurably. An additional increase in average global temperatures is not only possible, but very probable, while human intervention in the natural climatic system plays an important, if not decisive role. And who is affected by climate changes? In a word, everyone. Climate change – a change in the average weather conditions – may have both positive and negative effects in individual cases, but it can never be without consequences. Since the weather influences all areas of life, climate changes affect each and every one of us. Thus, the decisive issue again is not whether we have to adapt, but to what, when and how." Risks and opportunities for insurers and reinsurers are a business consideration also addressed in the report.

Munich Re supports the Climate Insurance InitiativeThis initiative is formed by insurers, climate change and adaptation experts, NGOs, and policy researchers intent on finding solutions to the risks posed by climate change. MCII provides a forum and gathering place for insurance-related expertise applied to modern climate change issues. The following research is an example of the work performed. .
.

Swiss Re's website, www.swissre.com, hosts a number of publications dealing with climate issues. A report published in 2007 details Swiss Re's efforts at managing risks related to climate change.

The ACE Insurance Group's report on their company's response to climate change is found in the following report:

Microinsurance and Economic Sustainability

Insurers have both a social interest and a commercial interest in microinsurance, sometimes as part of their own geographic diversification. By providing microinsurance to individuals, cooperatives, and small businesses, insurers can help reduce poverty, and the vulnerability of poor populations due to accidents and illnesses. Through the use of microinsurance, insurers can help establish the cultural infrastucture for insurance products in emerging markets. They may also bring new skills sets; larger commercial insuers offer technical skills and underwriting capacity that local insurers may not have, and provide technical competencies to microfinance institutions.

Microinsurance can reduce credit default risk on the people and property involved in microloans. By reducing this risk, microinsurance increases the availability of microloans and may reduce the financing cost of microcredit.

While poor people often improve their financial positions with microcredit, they easily fall back into poverty as soon as they face a financial crisis such as the death of a breadwinner, payment of essential health care costs, or the loss of productive assets. The donor's role in microinsurance is significantly different from that in microfinancing, calling for a broad focus on the creation of enabling macro-, meso-, and micro-level environments for microinsurance. This, in turn, will make it possible for more products to get to low-income markets, improving the risk management capabilities of the poor and decreasing their vulnerability. The article USAID's MD Overview : Microinsurance explains the use of the Microinsurance Note Series to this end. By linking life insurance to the credit--often on a mandatory basis--MFIs had the assurance that the loan would be covered should the borrower die. Credit life products, therefore, still account for most of the microinsurance policies sold to date. However, the microinsurance industry is still likely to encounter challenges such as building a wide network to achieve a critical mass of clients, establishing efficient administration and management systems, overcoming lack of trust and insurance awareness among the population, the creation of affordable products, and the control of moral hazard, fraud, and antiselection. The article From Microcredit to Microinsurance details other challenges faced with the rise of microinsurance as a fully fledged and recognised global industry service.

Different microinsurance products can help low-income households manage different risks. The USAID Microenterprise Development office helps with risk management by offering financial products such as savings, insurance and remittances--that could help households mitigate their risk and prevent the depletion of their assets in the case of shock. The Microfinance Gateway website includes articles and documents on different microinsurance products such as life insurance, health insurance, agriculture insurance and livestock insurance, among others.

In 2006, the Munich Re Foundation and the International Labour Office co-published Protecting the Poor, A MicroInsurance Compendium. Based on the lessons learned from a project launched by the CGAP Working Group on Microinsurance analyzing operations around the world, this volume covers microinsurance product design, marketing, premium collection and governance. It also discusses the various institutional arrangements available for delivery, the roles of key stakeholders, and strategies for achieving the right balance between coverage, costs and price.

The CGAP Working Group on Microinsurance seeks to promote the development and proliferation of insurance services for low-income persons through stakeholder coordination and information sharing. Its main development activities include developing donor guidelines, documenting case studies of insurance products and delivery modes, commissioning research on key issues such as the regulatory environment for microinsurance, supporting innovation that will expand the availability of appropriate microinsurance products, proposing performance indicators for microinsurance, and supporting a newsletter and website. CGAP case studies, as well as others, can be found here. The Working Group's activities will also be documented at the end of the year on their website under construction.

Specific Examples of Microinsurance Use

One example of how the insurance industry provide microinsurance is Swiss Re's initiative to cover African farmers against droughts ruining their crop harvests. Such iniatives hightlight the importance of sustainability, and the critical role of stable partnerships in the new markets.

In 2005, the country of Malawi, working with piloted a program for drought insurance to cover local farmers. The National Smallholder Farmers' Association of Malawi, in conjunction with the Insurance Association of Malawi and with technical assistance from the World Bank and Opportunity International Network financed by the Swiss State Secretariat for Economic Affairs, designed the index-based weather insurance contract that would pay out if the rainfall needed for groundnut production was insufficient. Dr. Jerry Skees at the University of Kentucky has written a number of studies on weather-indexed insurance products in Africa including the Potential of Weather Index Insurance for Spurring a Green Revolution in Africa .

In 2006, the World Food Programme (WFP) partnered with French firm Axa Re to pilot a programme to provide cash payouts to farmers in the event of a severe drought. Now, they are working with the Ethiopian government to expand the programme for three years from 2009. Officials are hoping to raise US$230 million in insurance and contingency funds to cover 6.7 million people if there is a drought comparable to the one in 2002/2003. See article below.

Another example is The Munich Re Foundation, which seeks to find innovative solutions in the context of international population development and globalisation and their impact on the future of humanity in countries in different stages of development. At the Poznan conference in December 2008, their inititives were highlighted in an article entitled, "Experts examine risk-pooling through insurance to help poor countries cope with climate change."

The South African National Treasury department issued a paper examining the future of regulation on micro-insurance.

Paralife is in insurance company that offers microinsurance life products to people with disabilities in emerging market countries. These are people who would not normally be insurable in those countries because of their disabilities.

The Microinsurance Centre website provides a glossary of microinsurance terms, a list of resources related to microinsurance and links to other related organizations including a link to insurers and reinsurers involved in microinsurance.

Other entities also support the work of microinsurance, including governmental and non-governmental organizations. The United States Agency for International Development (USAID) microenterprise development strategy seeks to address two pressing challenges:

Unlike traditional charities and many other microfinance efforts, ACCION's programs are designed to cover their own costs. In their plan, borrowers pay interest on their loans – enough to cover the expense of making a loan. In this way, each borrower helps finance the cost of lending to the next. The more people the program reaches, the more resources it has to reach even more people.

Another microenterprise development agency, Micro Insurance Agency Holdings, Inc provides emerging entrepreneurs with access to small loans and training that will enable them to start or expand their businesses. As business income increases, the business is able to expand, and the effect spreads beyond the family into the local community, through employment and contribution to the local economy. Thus, the benefits of microenterprise development help grow not just businesses, but stronger communities as well.

Microfinance Opportunities focuses its initiatives in research, training, and technical assistance on three fundamental themes: financial education, microinsurance, and client assessment. Working with institutions within and beyond the microfinance sector, they have developed a range of projects addressing client-focused issues in each of these three core areas.

Allianz has a report on microinsurance projects in three different countries.

Links to Insurance Organization's Sustainability Initiatives

Business Schools, Risk and Insurance Programs, Educators and Sustainability Issues

Business schools, and especially risk management and insurance programs at businesses schools have a unique opportuntiy for facilitating sustainability issues as part of the overall social responsibility efforts that business schools are currently undertaking.

The University of Cambrige has a center called Program for Industry whose mission is "to help present and future leaders deepen their understanding of the social, environmental and economic context in which they operate and respond in ways that benefit their organisations and society as a whole." Their program addresses a number of Sustainabiltiy issues including a Sustainability Research Digest.

Earthwatch have interesting expeditions and educator programmes (ebarker@earthwatch.org)
http://www.earthwatch.org/ .

Illinois State University’s College of Business is among the first business schools in the United States to be signatories to the United Nations-sponsored Principles for Responsible Management Education (PRME), a framework for academic institutions to advance socially responsible corporate behavior. The Principles for Responsible Management Education are part of the United Nations Global Compact, an international initiative for businesses that are committed to aligning their operations and strategies with universally accepted principles in the areas of human rights, labor, the environment and anti-corruption. The Global Compact is the world’s largest corporate citizenship initiative and is committed to fostering social responsibility in business and world markets.

Providing solutions and examining risk and insurance concepts as they apply to sustainability is one important role RMI programs at business schools can perform. As mentioned earlier, Dan Anderson's work at the University of Wisconsin, and Kenneth Arrow's workserve are examples of what academics have done. A multidisciplinary team at the Illinois State University's Katie School of Insurance has been doing work on microinsurance in Ghana and weather-indexed insurance for agricultural risk in Africa. Students at ISU have won writing contests sponsored by the insurance industry. See attached winning papers.

.

Goran Svensson from Oslo School of Management, (Oslo, Norway), and Greg Wood Bowater School of Management and Marketing, Deakin University, (Warrnambool, Australia), developed and described a conceptual framework of sustainable leadership ethics which could be taught in business schools.

.Impact Development Training Group - aimed at business training/transformation and with some very innovative approaches linking training to sustainability related issues have some highly credible training solutions .

Stanford also has a program that considers these overarching social issues: