In 2006 while at Fireman's Fund / Allianz, I led development of the industry's first insurance coverages and risk services for certified green buildings. Voluntary green building standards were just beginning to take hold - there were a few hundred LEED certified projects nationwide - as commercial property owners became educated on the economic benefits of energy and resource efficiency investments. We successfully built a new product around the idea that responsive insurance products and risk services could net both topline revenue growth and better loss ratios. Fast forward: over the last decade, from my seat on the national board of directors (and Insurance Chair) at the U.S. Green Building Council, I've seen LEED certification in the U.S. expand to nearly 70,000 projects by the end of 2019 - led by commercial buildings, and more recent growth in residential and mixed-use asset classes. For insurers and intermediaries, the take-away is that greening our built environment is the new norm and it should guide product design, marketing and management, as well as underwriting guidelines and risk services. Insurers can look ahead to help shape and respond to some key real estate trends. First, while it’s too early to say for sure how the shifting commercial and home office landscape will resolve, there are strong indicators that COVID will renew attention to the health, wellness and productivity dimensions that (pre-pandemic) were already set to fuel a second wave of green building. At the same time, rising Nat Cat losses as physical risks, property exposure, value at risk and ailing infrastructure converge will further push green buildings - and indeed all real estate - to incorporate risk and resiliency, for example using the Resilience Rating System known as RELi, which I supported as a steering committee member.
Changes in the Natural Environment:
Our changing environment - and in particular the impact on Nat Cat losses - shouldn't be a surprise to any insurance industry executive. Long before climate change became a political issue, it was a legitimate emerging risk that should have been - and in fact was - on the industry's emerging risk radar. Munich Re was among the earliest to study and call out the issue globally back in the 1970s. In the U.S., the impact of climate change was slowly coming into industry dialogue in the 2000's. The U.S. federal government published its First National Climate Assessment in 2000, followed by record natural catastrophe losses approaching 300 billion (overall) in 2005, including four hurricanes (Katrina, Rita, Wilma and Dennis) that caused more than $57 billion in insured losses from 3.3 million claims - the largest losses on record for the insurance industry. Since then, three more interagency National Climate Assessments (notably, the product of broad domestic scientific consensus, through democratic and republican Administrations and Congresses) have plotted a steadily increasing warning about ever more precise impacts and future scenarios. Indeed from 2010-2019, The U.S. witnessed twice as many billion-dollar extreme weather disasters as the prior decade - with 2012 and 2017 joining 2005 as the costliest years on record. Our industry manages risk, not politics... and climate change must be part of our strategic planning. The issue impacts insurers and their book of business in ways that are already clear, like physical risks - and others like transition risks, liability risks, investment considerations, etc. that are still evolving. For those in our industry who don't put climate on their internal strategic agenda, expect growing external pressure from competitors looking to differentiate on the issue and regulators, investors, customers, and NGOs who will continue to push for industry action and disclosure. Laying low on climate change was never good strategy, and it simply doesn't make business sense. The insurance sector is diverse and there is no one size fits all response, but each industry actor needs to work to understand and manage how climate change impacts their business and stakeholders.
Changes in the Business Environment:
Finally, the business case for sustainability and corporate social responsibility has fundamentally shifted. The percentage of S&P 500 companies that publish an annual sustainability report has increased from 20% in 2010 to 90% in 2019. About half of companies have integrated sustainability into strategic planning. The key drivers are operational/economic benefits, investor interest, consumer/ customer demand, brand value, and reputational risk. Environmental sustainability and climate change has moved up the agenda to sit alongside social issues like ethics, diversity and inclusion among the top corporate sustainability priorities. Companies are rushing to set environmental targets - either to update previously set (and often not fully realized) targets for 2020 or to stake out their first public position - and many are embracing ambitious goals for climate neutrality. A smaller subset of companies are beginning to assess their business-specific climate risk scenarios, working to set science-based carbon reduction targets and implementing an internal price on carbon. In comparison with the swell of public target setting, thoughtful integration of climate, sustainability and broader ESG issues within the core business remains a challenge for many companies, which in turn creates competitive/market risks (for reactive companies) and opportunities (for sustainability leaders). Meanwhile consumer demand for sustainability is at an all-time high, with upwards of 75% of consumers in various surveys saying sustainability is important and more than a third saying they have switched from a preferred or known brand to a more sustainable alternative. Here too, the pandemic seems to be reinforcing consumer demand for sustainability as people become more sensitive to external / environmental risks that influence their personal sphere, spend more time (on social media) engaged with societal challenges, and seek escape through experiences in nature.
Sustainability has become “table stakes” for insurers, brokers and agents. Climate change effects are obvious, exacerbated by development trends and infrastructure shortcomings. Business continuity, disaster management and recovery plans, when they exist, are often inadequate and untested. Customers, shareholders and other stakeholders expect insurers to be sustainability leaders, and to offer responsive risk products and services. Insurance regulators' disclosure requirements and expectations continue to escalate. Organizations such as the United Nations Environmental Program’s “Principles of Sustainable Insurance” and guidance from the Financial Stability Board Task Force for Financial Disclosure are reshaping the landscape. The net zero energy and carbon neutrality commitments of many large insurers increase expectations for all.
With all of this in mind, SB+A is committed to helping our clients begin or advance their sustainability journey. We believe the stakes - and potential for companies to positively impact society and their bottom line - have never been higher. In many ways, in this time of social and economic upheaval, we see businesses and their stakeholders "hitting reset". Savvy leaders are looking for impactful and cost-effective ways to put sustainability to work to chart a profitable path into more normal - or "new normal." We are here to help.