Sustainability Megaforces and the Insurance Industry
In our previous two articles, The Ten Sustainability Megaforces and Sustainability Megaforces: Is the insurance industry prepared?, we discussed the ten sustainability trends that are expected to have the greatest impact and affect on the world of business. We look at these megaforces, more specifically, in the context of insurance industry.
Shifting consumer needs
Many international and local companies have introduced products responding to changing consumer needs and consumer preferences shifting to more sustainable behaviour – these include products targeting new and growing industry sectors, products with a ‘green’ element and products responding to new and increasing risks.
Sustainability factors will need to be considered in investments
Insurance companies will need a good understanding of sustainability trends in order to adequately structure investment portfolios. This involves a good assessment of the sustainability risks and opportunities faced at an industry level, and closer scrutiny of sustainability performance at a company level.
Figure 5 compares environmental costs per sector, showing how sustainability issues can hit the bottom line across various sectors. The data was compiled by Trucost, based on a dataset of over 800 companies over the period 2002- 10, and represents the value potentially at stake relative to EBITDA, if companies had to pay the environmental costs of their production.
Figure 5: Average environmental costs per sector
Figure 6: Environment intensity per sector
Figure 6 shows which sectors are seeing the largest rises in environmental costs, and which sectors are doing best at reducing their environmental intensity.
A 2012 report by carbon Tracker, entitled ‘Unburnable carbon’ has tried to estimate the size of the ‘carbon bubble’ being carried by the world’s financial markets. The carbon bubble is created as a result of unburnable carbon, in the form of fossil fuels, which cannot be burned due to existing limits on carbon emissions, but are still accounted for as the reserves of top oil and gas companies. The report estimates that up to 80 percent of assets are technically ‘unburnable’, meaning that certain company stocks may be highly overvalued.
These types of analyses, together with assessing individual company responses, will become more and more relevant in making prudent investment decisions.
Sustainability trends provide both greater risk and new opportunities to drive business value for the insurance industry. Companies therefore need to understand how these risks impact policyholders, their risk profiles and their needs in order to design the correct strategic response. We are starting to see the emergence of innovative products locally and internationally, but the industry will need to respond to these risks far more uniformly and concretely, especially in the updating of actuarial models to take growing sustainability risks into account. There is great opportunity for collaboration in this space, whose full potential has not yet been explored. For example, partnerships between companies and with research institutions to update actuarial models may lessen the burden on individual companies.
The insurance industry, through its ability to mitigate risk also has a very important role to play in mitigating the risks posed to society. By proactively designing products to respond to the most pressing sustainability megatrends affecting their customers, insurance companies can reduce their own risks and improve benefits for policyholders in a manner that makes business sense. The industry should also look to find further innovations to insure previously uninsurable market segments. This includes looking into partnerships with other organisations in the pursuit of such innovation.
About David Okwara
Africa, agricultural, Allianz, business analysis, business value, challenges, consumer, consumption, energy project, environmental trends, extreme weather, financial services, fossil fuels, Gateway Toll road, HSBC, innovation, innovative products, insurance industry, investment, investment portfolio, liability, megatrends, offshore gas production, Oil and gas, production, renewable energy, risk, risk and reward, risks, sustainability, sustainability megaforces, sustainable, transformation, urbanisation, weather, Zurich