Sustainability Megaforces: Is the insurance industry prepared?

This post follow on from our previous article, The Ten Sustainability Megaforces, in which we detailed the ten sustainability trends/megaforces that are expected to change the world and affect all businesses and sustainability in the next 20 years.

Implication of sustainability megaforces for the insurance industry

Three key factors can affect the profitability of the insurance industry:

  • The difference between predicted and actual claims and losses
  • Revenue generated from policy plans determined by policy uptake, lapses and surrenders
  • Investment income

The key sustainability megaforces are likely to present risks and opportunities in relation to each of these factors.

Claims and losses may be larger than predicted

The insurance industry relies on the ability to make informed predictions of future events as the basis for taking actions in the present. Increased severity and/ or frequency of weather events, if not adequately accounted for, will mean that claims exceed levels predicted by actuarial models, and premiums will not be set correctly. Figure 2 illustrates the trends in the number of disasters reported internationally per year.

Figure 2: Trend in the number of reported disasters per year


This trend has also been evident in South Africa, with severe weather conditions such as flooding in Mpumalanga and Limpopo and heat waves, fires and droughts in the Western Cape. Climate projections are that this trend is set to continue. Figure 3 shows the projected change in the annual frequency of extreme rainfall events, with the darker blue areas indicating an increased number of events per year for the period 2035-2065 relative to the period 1961-2000. Figure 4 illustrates the increase in the number of extremely hot days (above 35 degrees Celsius) over the same periods, with South African regions experiencing up to 90 additional events per annum. This highlights the urgent need for local businesses in all industries to reassess their risk profiles.

Figure 3: Projected change in annual frequency of extreme rainfall events (2035-2065 vs. 1961-2000)

rainfall figure

Figure 4: Projected change in annual frequency of very hot days (2035-2065 vs. 1961-2000)

hot days figure

An added challenge is that models of weather and climate patterns are fairly accurate at predicting short- term (weekly or monthly) change, and reasonably good at predicting long-term changes (such as temperatures and rainfall patterns in 2050). They are, however, poor in forecasting quarterly or annual changes, which are often major influences and the appropriate time period for an insurance company’s decision-making and planning.

Increased pressure on public infrastructure and service delivery

In addition to climate change-related risks, population increases and urbanisation place severe pressure on public infrastructure and service delivery in cities. This creates additional risk for insurers, as claims related to failing infrastructure may increase – for example, through deteriorating roads leading to increased vehicle accidents. South Africa has seen some innovative examples of local insurance companies investing socially.

These actions may appear to be traditional corporate social investment (CSI) initiatives. However the interventions directly add business value through the brand exposure created, and through reducing the likelihood of accidents resulting in claims.

Two examples of investing socially: 

Dial Direct introduced the Dial Direct ‘Pothole Brigade’ tasked with the repair of potholes along Johannesburg’s major arterials. This initiative was unfortunately recently disbanded due to challenges in coordinating with the local municipality.
OUTsurance launched the ‘OUTsurance pointsmen’ initiative in response to the traffic problems in Johannesburg and Pretoria. Broken or malfunctioning traffic lights, which are common throughout both cities, exacerbate traffic congestion and lead to accidents.

The OUTsurance pointsmen patrol major intersections and when traffic congestion increases or there is a traffic light outage, they man these intersections and direct traffic.

Consumers’ ability to pay premiums may change but there will be new revenue opportunities

Many sustainability trends related to scarcity of resources, such as rising energy prices, rising food prices and substantial increases in water pricing mean that consumers and businesses may have less disposable income. As basic goods become more expensive, and premiums rise due to increased risk – policy lapses and surrenders are likely to increase.

In the South African landscape, a number of insurance companies offer innovative insurance products. These reduce the cost of living for the consumer and also reduce the likelihood of claims by offering financial rewards for prudent behaviour. These products respond to an environment of rising energy and food prices.

Discovery’s vitality wellness programme is an
 example of a product linked to a medical aid scheme. It incentivises members to adopt healthier habits by offering them various financial benefits such as cash back when shopping with selected partners and notably, discounts on healthy foods such as fresh produce at their grocery partner. In turn, healthier behaviour in consumers is likely to reduce medical aid claims in
the long run. Discovery may receive contributions for longer periods, thanks to increased longevity. More recently, Discovery has introduced ‘fuel rewards’ for its car insurance policyholders in the form of cash back on fuel purchases. This bonus is based on safe driving behaviour monitored using vehicle-tracking technology. Again, more prudent driving behaviour on the part of policyholders is likely to result in lower claims and more efficient fuel consumption.

Sustainability trends present opportunities and challenges for the insurance industry

On the other hand, there are sustainability trends related to demographic changes such as population increases, urbanisation and a growing middle class. Together these provide a key opportunity to increase revenue, as they may lead to increased demand for insurance policies. There is great potential for the insurance industry to tap into this growth and provide insurance to a growing middle class with shifting lifestyle and consumption patterns.

There is also great opportunity to develop innovative new products and services to generate additional revenue in response to certain sustainability trends. Growing urban populations mean water, transport and health infrastructure will need to keep pace. This is particularly challenging in developing countries due to budget and capacity constraints. As a result, there will be opportunities for insurance companies to innovate with products that both make business sense and help cities in responding to their growing populations.

What are your views on the sustainability trends that are set to impact and affect the insurance in the coming years?

David Okwara

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