insurance climate change
Europe Insurtech Thought Leadership

EIS: Insurance is a Critical Industry in the Fight Against Climate Change

COP27 has once again highlighted the importance of companies playing their part in fighting climate change. Individual organisations doing so is a start, but industry wide change must take place. The insurance sector is no different. 

Speaking to The Fintech Times, Rory Yates, SVP of corporate strategy at EIS explains why it is so crucial that the insurance sector acts against climate change, and how it can do so.

Rory Yates has more than 24 years of business leadership experience spanning client, agency, consultancy, start-up, and private equity roles. As EIS’ SVP of corporate strategy, Yates helps insurers achieve their transformation goals and evolve toward ecosystem-based futures via insurance core systems transformation, including truly personalised engagement, quickly taking innovation from concept to market, and growing efficiently.

Insurance: A Critical Industry in the Fight Against Climate Change
Rory Yates, SVP of corporate strategy at EIS
Rory Yates, SVP of corporate strategy at EIS

From “sustainability” to “net zero” to “ESG,” there are lots of terms swirling about the topic of climate change, but relatively little agreement around how we as a species will respond. One thing we can all agree on is that something needs to be done at an industrial level, and one industry that could be leading the charge is insurance. Insurers sit at the intersection of climate change, risk prevention, and recovery and must prepare now to operate in a dramatically different environment.

Directly exposed through the products they design and sell, climate change and associated phenomena – forest fires, flood, drought, and even migration – have pushed insurance companies into losses. As a result, insurers are reconsidering how they understand, price, and avoid these risks. Yet, despite the enormity of the challenge, it also poses opportunities for insurers ambitious enough to take a leadership position in the fight against climate change.

Combine the potentially catastrophic consequences of climate change with emerging risks, and it’s clear our physical environment and the risks it poses are changing.  What’s more, that change is accelerating.

For insurers, emerging risks include:

A new role for insurance: Risk prevention

Insurance has always been vital to human progression and sustaining human, civil, and business infrastructure. When we’re walloped by risk, insurance is there to help us recover from the economic consequences of our risk exposure. Increasingly, though, insurers are acting to prevent risk.

Conceptually, risk prevention has been discussed as a transformation driver since 2012, when the United Nations created the Principles of Sustainable Insurance. “The purpose of the PSI Initiative is to better understand, prevent and reduce environmental, social and governance risks, and better manage opportunities to provide quality and reliable risk protection.”

As insurers find it increasingly hard to predict the impact of climate change, they also aren’t willing or even capable of taking on the associated economic burden. So now we see an immediate need to help manage the risk out. This has become an imperative and not just an opportunity for differentiation and competitive advantage.

One way is by working with new data sources to help providers better predict and prevent flood risks. We also see insurers acting as data service providers to help farmers understand evolving risks of crop failure and how to minimise it. These are all great examples of how insurance can sit at the centre of climate change adaptation.

Insurers are investing in change

Moreover, insurers are large investors, and many have expressed their intention to divest from businesses that do not yet have net zero goals. This is both environmentally valuable and economically savvy. Already we see firms in the S&P 500 valued as much as 50 per cent higher than those without. This discrepancy in valuations will be a vital driver in the broader change needed.

However, it becomes a bit more tricky regarding insurers’ own net zero plans. Recently we looked at the stated goals of 48 of the largest insurers in EMEA. While many have made progress with Task Force on Climate-Related Financial Disclosures or Sustainability Accounting Standards Board disclosures, comparatively few have expressed net zero goals and commitments.

This seems contradictory, but I have some empathy for insurers. Insurers are large and complex ecosystems with supply chains in IT, claims services, global office footprints, large workforces, and distributed services beyond. With the further proliferation of product distribution and human interaction, direct and indirect carbon emissions are hard to identify and tackle.

Given the scope, simply stating a net-zero goal without insurers knowing how they will tackle these many concerns would be reckless. Further, given the disclosure standards, they would largely be rejected anyway.

Data driven sustainability

This is where data-driven sustainability is vital. Knowing where all of the emission points are takes a lot of work. Harder still is identifying and planning ways to reduce or eradicate them. However, insurers must play their part, and we will see increasing actions in this space over the next two years.

Directly impacted by climate change and given the views of CEOs like Amanda Blanc of Aviva, I expect to see an exponential increase in significant action. The insurance industry is deeply interested and invested in reducing the risks of climate change and must adapt how insurance operates, as well as the products it offers.

Tech for a more human insurance experience

From here forward, adaptability – to the reality of climate change and a new business environment – will be the key to competitive change in insurance. We already see insurers trying to adapt to customer experience expectations and moving away from “compete-only-on-price” strategies.

Forever, insurance has been referred to as a “people business.” In its first foray into the digital marketplace, insurers themselves seem to have forgotten that, leading to the commoditisation of the industry. It’s not good for customers; and for insurers, it has become destructive. As insurance finds its way to the cloud-native ecosystem-enabling technologies of Amazon or Netflix, it will become far easier to offer personalisation in terms of products, bundles, communications, and experiences.

While insurance already plays a vital role in our lives and economy, its ability to take in new data sources, embed insurance into peoples’ lives, reduce risk and its impact, and create new products and services will determine which insurers succeed in this changing environment.

Facing climate change together

Amid all this transformation, people always ask one question: “What’s in it for me?” In the case of climate change, it’s relatively easy to answer, at least at an existential level. But few people, in my experience, accept their mortality. And in any case, it’s a negative driver, which can meet with rejection.

The focus now needs to be on making insurance better, more resilient, more relevant, more embedded, contextual, and ultimately an “experienced” service. To do this, we need to see the ecosystem insurer emerge. Data fluid, intelligent, built around the customer, born in the cloud on sustainable technologies, and capable of rapid change.

Climate change clearly has made its way to the boardroom, filling me with hope. Demystified and democratised, this fight against climate change is something we will all face together.

 

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