How can insurers elevate their societal purpose in a financially sustainable way?
At face value, it may seem that insurers could be forced to confront the choice between doing well or doing good. But this does not necessarily need to be the case.
Over the past few years, the rise in extreme weather events, combined with high inflation raising the cost to repair vehicles, homes, and commercial real estate,76 pushed claims losses to unprofitable levels in related lines of business.77 To return to profitability, many insurance providers hiked premiums in impacted lines; some even retracted coverage altogether.78 Faced with fewer options and rising costs of coverage, more and more customers are now at risk of being underinsured or uninsured.79
While this scenario may seem dire, insurers who innovate and collaborate could use this as an opportunity to foster resilience and sustainability and create a better balance between profitability and equity. Emerging technologies and alternative data sources are now available to help stem the mounting losses, which can benefit many stakeholders. Insurers should ensure these technologies and data sources are used properly and with transparency to build trust and be recognized as stewards of purpose.
However, a perceived lack of transparency around the collection and use of some of the data currently being included in underwriting decision-making is becoming concerning to both consumers and regulators. For example, while consumer uptake of telematic devices that monitor driving behavior has been underwhelming since its inception in some regions,80 it is now possible for insurers to harvest this data from less obvious sources, such as apps that drivers already have on their phones.81 They can then use this data to underwrite policies, often without full transparency to the driver.82
While these data points can generate more precise underwriting, to help minimize mistrust among consumers and regulators, insurers should be transparent and disclose the information they are using to rate drivers. Insurers can also consider incentivizing mitigation strategies, such as issuing a driving score (similar to a credit score) to policyholders. These scores can be raised when driving behavior improves and then reflected in pricing.
Moreover, as technology evolves, insurance companies should work to free their underwriting models of all inherent bias. This could be particularly important where those preconceptions adversely affect vulnerable communities already plagued with affordability and access challenges due to their location. Regulators are already looking into this. For example, Colorado is currently developing a regulatory framework for insurers to help prevent bias and discrimination in AI models.83
Insurers are also recognizing the importance of conserving natural capital to drive down claims costs. They may need to guide clients to move away from a linear economy (take-make-waste) to a circular economy approach (reuse-transform-recycle). Doing so can help foster an ongoing product life cycle,84 ensuring that the parts used to repair damaged assets stay in circulation for a longer time. For example, some European insurers allow auto vendors to reuse spare parts for repairs, making the process environmentally friendly as well as economical.85
Insurers could further incentivize supply chain partners to use renewable raw materials and recycle end products, as well as convert their own insurance products into services like usage-based auto insurance, which tailors pricing based on the actual driving behavior of the policyholder. They can also consider giving premium discounts to clients in the construction and real estate sector that apply green chemistry, an approach that aims to prevent or reduce pollution and improve overall yield efficiency.86 These discounts could be applied across the life cycle of construction products, including its design, manufacture, use, and ultimate disposal, since it could reduce risk exposure for insurers.
For risk elements that insurers have less influence over, like climate change, insurers can influence, collaborate, and incentivize mitigation strategies to ensure more profitable and equitable coverage. One program in Alabama offers homeowners discounts on their insurance policies when they follow specific standards for construction or retrofits.87 In Mississippi, a bill pending in the state House could create a trust fund that could provide grants to homeowners for fortifying their homes against severe weather or building safe rooms for tornadoes.88
In a recent Deloitte FSI Predictions article, analysis revealed that if insurers, in partnership with government entities and policyholders, invest US$3.35 billion in residential dwelling resiliency measures, the two-thirds of US homes that are not currently built to adopt and follow hazard-resistant building codes can become resistant enough to reduce many weather-related claims losses. This could save insurers an estimated US$37 billion by 2030.89
For life insurers, climate change impacts health/morbidity and mortality in a more subtle way. Factors such as poor air quality due to increased pollution or wildfire smoke can exacerbate respiratory and cardiovascular conditions, leading to higher morbidity and premature mortality.90 To help minimize the overall risk profile, insurers, in partnership with other stakeholders, could explore collaborative investments in communities residing in these detrimental living conditions and promote health awareness and the benefits of early prevention of diseases. For example, several insurance companies in India that offer coverage for diseases caused by pollution, like asthma and chronic obstructive pulmonary disease, also include the cost of air purifiers and specialized respiratory medications.91
Regulators could introduce policies that encourage insurers to underwrite certain emerging risks like renewable energy technology. Government support and incentives could potentially lower the capital charge on assets or liabilities associated with renewable energy projects, benefiting society and potentially lowering insurers’ risk profile.92
Many of the risk mitigation and incentivization strategies being employed are still in their nascent stages. Insurers that are already experimenting have the ability to make adjustments to the way data is collected, processed, and used. As regulatory bodies, insurers, vendors, data suppliers, and policyholders get aligned, insurers that can transform traditional mindsets and processes in this challenging environment can take advantage of unprecedented opportunities to more effectively balance profitability with purpose.
The US National Association of Insurance Commissioners announced its strategic priorities early this year, launching a state-level data collection drive to better understand localized protection gaps in property insurance markets. These insights can provide guidance to state insurance regulators to address climate risk resilience and increase access to consumers at a national level.93
In the insurance industry, where 75% to 90% of emissions are Scope 3 (indirect greenhouse gas emissions that occur outside an organization’s direct control), direction on measurement is also critical.94 The Partnership for Carbon Accounting Financials has released guidance on measuring insurance-associated emissions for commercial and personal motor lines, but it could require insurers to collect vast amounts of data that is often not readily available.95 Calculating financed emissions also presents similar challenges, in particular for life insurance companies, which tend to have a large long-term investment profile.
As sustainability programs evolve, they are shifting from quantity to quality. Insurance companies are increasingly focusing their resources on reporting what’s most crucial to their organization rather than striving to cover everything.96 Moreover, the industry could see a shift from siloed compliance reporting to embedding sustainability into business strategy decisions. Introducing new metrics, such as implied temperature rise97 and portfolio warming potential98 —designed to assess and manage climate-related impacts of investment portfolios—involve complex, multidimensional data analysis. Therefore, they are expected to require long-tail investment portfolios to develop new modeling capabilities.99
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2024-09-28 18:30:00
