Insurance and Sustainability (3)

Risk, Insurance and Sustainability

Jim Jones, CPCU,ARM,AICKatie School of Insurance

Illinois State University

Overview

• What is Sustainability?• Why should businesses care?• How are businesses responding?• How is the insurance industry affected by

sustainability issues?• What role does the insurance industry

play?

What is Sustainability?

• “The capacity to maintain a certain process or state indefinitely”

• “Development which meets the needs of the present without compromising the ability of future generations to meet their own needs”

Key Forces Threatening Sustainability

• Linear System of Resource Use• Population Growth• Energy Demand• Consequences of Climate Change Due to

Carbon Emissions • Growing Debt (National and Personal)

Ex. What is NOT Sustainable

This linear system must be changed to one that is cyclical, and more efficient at every point

U.S. Environmental Protection AgencyUndated document downloaded October 22, 2002

MSW is Municipal Solid Waste (Trash)

World Population Year 1800‐2100

2011

World Energy Demand By Fuel Source

Source: HWWI, ifo, IfW, December 2007 (f: forecast

Source: zfacts.com

Adapted from www.climatescience.gov

Gross Water Withdrawals1900-2025 (est.)

http://www.sociologyonline.net/c6b739g.htm

Source: United Nations, Human Development Report 2006, p.138

Quiz: What is Sustainability?How do these trends affect sustainability

• “The capacity to maintain a certain process or state indefinitely”

• “Development which meets the needs of the present without compromising the ability of future generations to meet their own needs”

• We are using resources at a rate that places future generations in peril

What is BUSINESS Sustainability?

Triple Bottom Line

• People • Planet • Profits

Characteristics of Business Sustainability

• Transparency• Engagement of all

stakeholders• Social Responsibility• Better Products and

New Revenues

Why Businesses Should Care• More efficient. Reducing waste saves money• Helps to protect reputation and brand• Attracts loyal customers • Provides opportunity for new products• Attracts loyal employees• Attracts loyal investors • Required for many global business partners• Meets corporate social responsibility goals• Complies with government regulations

Sustainability Becoming Transparent and Required For Investors

As economy turned south so did investment in sustainability funds but investors returning now

ISO 14000-Competing in Global EnvironmentISO 14001:2004 is a management tool enabling an organization of any

size or type to: 1. identify and control the environmental impact of its activities,

products or services, and to 2. improve its environmental performance continually, and to3. implement a systematic approach to setting environmental

objectives and targets, to achieving these and to demonstrating that they have been achieved.

Sustainable Business Strategies“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.” -James Strong, Chairman

Insurance Australia Group

Changing Linear to Cyclical By Using Recycled Materials

Recycled Materials

Change Production Process

Reduce Waste and Hazardous Emissions

Change Distribution

Change Packaging

Construction Industry• Construction in the US is responsible for:

– 39% of total energy use includes 65% of electricity

– 39% of municipal solid waste– 35% of greenhouse gas – 40% of all raw materials which include

• 25% of timber harvest• 12% of potable water usage

“GREEN” Construction

• Whole-building sustainability in key areas of human and environmental health

- sustainable site development- water savings- energy efficiency- materials selection- indoor environmental quality

Why should insurance industry care about sustainability?

• Takes on risks created by unsustainable practices– Must identify these risks, map them, mitigate them,

and monitor them• Must understand and accept new risks from new

greener practices• Insurers can promote sustainable practices through

– Discounts, Underwriting, Loss Control Services • Can benefit from being a green company• Has opportunities for new products

– Loss prevention, insurance products, claims management, services promoting public awareness

NATURAL DISASTERS IN THE UNITED STATES, 1980–2011(Number of events, Annual totals 1980–2010 vs. first six months 2011)

Source: © 2012 Munich Re. NatCatSERVICE.

U.S. THUNDERSTORM LOSS TRENDS(1980-2011)

Source: © 2012 Munich Re. NatCatSERVICE.

“We judge global climate change will have wide‐ranging implications for US national security interests over the next 20 years.”  p. 4

Increased Agricultural Risk in Developing Nations

Insurers Need to Identify, Map, and Mitigate Risks 

Ex. What is relationship between climate change and life insurance?

Income1. Carrier re-underwrites

book in coastal area2. Agent loses income3. Agent finds another job4. Nobody left to write life

insurance5. Company Loses Life

Insurance income

Losses1. Temperature increases

1 degree2. Vectors of disease

increase (Flies, mosquitoes, lice, algae)

3. Since 1980, 30 serious and deadly infectious diseases created

GREEN CONSTRUCTION

• Green Features affecting Insurance– Vegetative Roof Systems– Alternative Energy Systems

• Solar, Wind• Bio mass, Bio gas• Geo thermal

– Alternative Water Systems• Gray water• Ground or storm water recycling

Green Roofing

What are risks and opportunities posed by green roofing systems?

Risks with New Technologies

Benefits of One Insurer “Going Green”

In 2003, Midwest Family Mutual began “Work from Home” initiative  resulting in: 

• Employees burned  25,000 fewer gallons of fuel per year. • Company reduced its annual electricity consumption 63% and 

natural gas consumption by 76%. • Used  65%  less paper with the implementation of extensive 

electronic notification processes. • Improved employee satisfaction • Improved ability to source talent from much broader geographic 

area • Increased customer satisfaction  by increased responsiveness even 

in harsh winter days• Decreased its expense ratio by 7.6%  Meaning more of each 

premium dollar going to its Policyholders. • Grew revenue by 62% and policy surplus reserves by 100%. 

New Products, New Branding, New Opportunities

Katie School Student and Faculty Project: (Developing Crop Insurance in Ghana)

• Received ILO Grant to Study Potential of Developing Insurance for Crops in Ghana

• Katie School gathered and analyzed via actuarial students assisted by Ag. Business and actuarial, and COB faculty in developing crop insurance product in Ghana

New Course Fall 2012 Sustainability, Risk Management and Insurance FIL 382

Course Objectives

1. Identify key economic and environmental risks facing businesses and explain the interconnections among these risks

2. Explain the common causes of risks stemming from “unsustainable” business, consumer, and government activities

3. Explain the benefits to businesses having sustainable business practices

4. Explain the relationship between sustainability, risk management, and insurance

5. Describe new risk management tools being developed to help address sustainability issues

Phase 1 Phase 2 Phase 3

Business & Sustainability Minor:Milestones & Evaluation

B.E. & S Minor Approved 2012

Application by first cohort (Fall 2012)

•Seek Employer Support and Feedback

• Evaluate Minor and submit revised Minor•Revise enrollment and admissions reqs.•Develop  white papers, research, and workshops supporting minor •Based on  “soft money” evaluate potential for student scholarships and faculty grants

•Evaluate Minor•Revise enrollment•Consider  Major  in B&S•Add  new courses • Work with Corporate sponsors• Establish  B&S Student Organization• Consider Viability of B.E. & S  Institute at ISU

Contact Information

Jim Jones, CPCU, ARM, AIC, [email protected]

Sustainability Blogwww.Sustainabilityriskmanagement.blogspot.com

Microinsurance Blogwww.illinoisjones.blogspot.com

Exposures in the risk fieldPhysical 

Environment

Economic Environment

Social Environment

Political Environment

Legal Environment

Operational Environment

Cognitive Environment

Physical Asset Exposures

Financial Asset Exposures

Human Asset Exposures

Legal Liability Exposures

Moral Liability Exposures

Risk Field

What Insurers Are Doing• “Addressing Climate Change

– “Green” Products• i.e. http://www.acegreen.com/products

– More energy efficient operations• http://www.newwindenergy.com/about-us/press-releases/press-release-

detail/article/ing-to-power-all-us-operations-with-wind-power/

– Investment strategies– Joining Climate Council

http://www.sustainablelifemedia.com/content/story/climate/11012007

– Discounts for “greening” activities• i.e. http://www.treehugger.com/files/2006/12/travelers_insur.php

What Insurers Are Doing

• Micro-insurance– Insuring crops– http://www.swissinfo.org/eng/front/detail/African_farmers_offered_drought_insura

nce.html?siteSect=105&sid=8264017&cKey=1191001660000&ty=st

– Insuring poor people with disabilities• http://www.paralife.com/ingles/media_news3.htm

– Insuring livestock• http://www.treasury.gov.za/public%20comments/The%20Future%20of%20Micro-

insurance%20Regulation%20in%20South%20Africa.pdf

– Insuring “breadwinner”

Quotes• As David Lear, Executive Director of Sustainability at Dell, explains, sustainability has evolved

from a sense of doing the right thing “just because” to a state of doing the right things because “doing so reduces risks and costs.”He cites the example of Dell’s recent decision to become the first computer manufacturer to offer bamboo packaging to its customers.

• Not only does bamboo grow more quickly than traditional organic packaging materials, but it can also be grown adjacent to Dell’s manufacturing facilities, thereby reducing transport costs and greenhouse gas emissions.

• “By offering our customers bamboo packaging, we also help them avoid disposal taxes levied in certain jurisdictions on traditional packaging waste,” explains Lear.

• The Spanish shoe company Camper offers another example. Its Wabi shoe range is produced from just three components.

• By cutting down on the materials used, the company made the shoes easier to recycle and cheaper to produce. It also meant that they could streamline the supplier base and gain greater visibility into the costs of production.

• “If you reduce the number of materials and components in your products, you are reducing your costs, as well as your environmental and social risk,” says Climent. “In that equation, sustainability and profitability go hand in hand.”

The Sustainability Imperative CFO Insights: A newsletter from Deloitte’s CFO Program

• The increasing importance of this issue to stakeholders is also not lost on CFOs. In fact, more than three-quarters of survey respondents indicated that it is important or very important to communicate about sustainability to shareholders and institutional investors

• http://www.deloitte.com/view/en_US/us/Insights/browse-by-role/Chief-Financial-Officer-CFO/CFO-Insights/38a611f203483310VgnVCM1000001a56f00aRCRD.htm

• The mission of the Principles for Responsible Management Education (PRME) develop a new generation of business leaders capable of managing the complex challenges faced by business and society in the 21st century.

• Leaders who understand – Global social responsibility and sustainability.– Need for businesses to meet social and environmental responsibilities

Global Water Withdrawals

Irrigation water withdrawal (IWW) and consumption (IWC) relative to global water withdrawal (GWW) and consumption (GWC) 

Shiklomanov, 2000