The UN, Insurance and Climate Change

The UN, Insurance and Climate Change

November 19, 2009 11:55
by J. Wylie Donald

At the end of October





and as part of the run-up to the Copenhagen climate summit, the United Nations Environment Programme - Finance Initiative (UNEP FI) released its report: The Global State of Sustainable Insurance. Frankly, I don't know what to make of it because I can't figure out how one could assess the global state of anything without at least trying to be comprehensive. This report, unfortunately, does not include the risk management community of insureds in its survey group. This leaves one with the suspicion that the report's conclusions lack a comprehensive foundation. The buyers of insurance are an essential part of any insurance transaction. It will do no good for sustainability if insurers agree to offer "sustainable insurance" policies, but no one wants to buy them. Even if buyers can be found, are the policies offered what insureds really want, or simply what they are forced to make do with? I emailed my concerns to the report's lead authors but have had no response.

Setting aside that subject, the report may set the stage for some important changes. The





UNEP FI's purpose was to investigate how the insurance industry might be engaged to assist society address ESG - environmental, social, governance - risks1 in order to ultimately establish a set of Principles for Sustainable Insurance. One can understand the interest. With over $4 trillion in premium collected and almost $20 trillion under management, the insurance industry has some clout.  To sum up, the authors wrote: "we believe that the insurance industry -- whose core business is to manage risk -- must lead in understanding a rapidly changing risk landscape and address global sustainability issues with rigour and innovation. The scale of these issues is too big for any one institution to tackle -- it requires collective action and long-term solutions."

The researchers identified various sustainability and insurance topics and surveyed 260 Respondents, many of whom were officers and employees of UNEP FI member companies (





primarily insurers and reinsurers) and various brokers, agents, insurance organizations and insurance regulators, as well as certain interested NGOs. The researchers discerned five themes from the survey data.

1. ESG factors influence underwriting.

2. Management of ESG factors can enhance earnings via avoided loss and new product development.

3. Underwriters' assessment of ESG risks leads them to conclude that society's response is underdeveloped.

4. ESG factors in developing regions are



evolving differently but there are global commonalities.

5. Active promotion of ESG risk management is needed.

The report offers a self-described deep thought:





"One of the more profound insights from the survey was the extent to which underwriters judged ESG risks to have significant loss potential, and yet the societal response on the evolutionary progress scale [a measure used in the report] was indicative of societal response 'lagging' the underwriter's assessment of the risk involved." In other words, even though underwriters felt ESG risks could cause significant loss, society was not yet addressing these risks through legal or regulatory action. The report posed the following questions: "whether a regulatory or legal framework is a precondition of insurability, or whether it is simply one of many important issues that influence the underwriting process." For my money, "regulatory and legal frameworks" are sometimes preconditions of uninsurability. Environmental and asbestos exposures jump immediately to mind. Further, one need only examine the flight of insurers from residential property in the hurricane-prone south to identify areas where it is simply profitability that determines insurability.

Nevertheless, one can anticipate that the report will lead to change. Our era is all about awareness. If connections are drawn between human trafficking, child labor, loss of biodiversity, rising sea levels, and corporate vice, on the one hand, and insurance and reinsurance on the other, it is certain that there will be changes in how we deal with these problems, and insurance may even help to solve one or two of them.

1ESG risks include, for example, climate change and loss of biodiveristy, human rights and aging populations, disclosure and ethics.

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