Risk, Insurance and Sustainability

Jim Jones, CPCU,ARM,AIC Katie 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

MSW is Municipal Solid Waste (Trash)

U.S. Environmental Protection Agency Undated document downloaded October 22, 2002

WorldPopulationYear18002100

2011

WorldEnergyDemandByFuelSource

Source:HWWI,ifo,IfW,December2007(f: forecast

Source: zfacts.com

Adapted from www.climatescience.gov

Gross Water Withdrawals 1900-2025 (est.)

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

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

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 Environment

ISO 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 to 3. implement a systematic approach to setting environmental objectives and targets, to achieving these and to demonstrating that they have been achieved.

Sustainable Business Strategies

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
Simply

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, 19802011 (Number of events, Annual totals 19802010 vs. first six months 2011)

Source: 2012 Munich Re. NatCatSERVICE.

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

Source: 2012 Munich Re. NatCatSERVICE.

Wejudgeglobalclimatechangewill

havewiderangingimplicationsfor USnationalsecurityinterestsover thenext20years.p.4

IncreasedAgriculturalRiskin DevelopingNations

InsurersNeedtoIdentify,Map,andMitigateRisks

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

1. 2. 3. 4. 5. Income Carrier re-underwrites book in coastal area Agent loses income Agent finds another job Nobody left to write life insurance Company Loses Life Insurance income Losses 1. Temperature increases 1 degree 2. 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

In2003,Midwest Family Mutual beganWorkfromHome initiativeresultingin: Employeesburned25,000fewergallonsoffuelperyear. Companyreduceditsannualelectricityconsumption63%and naturalgasconsumptionby76%. Used65%lesspaperwiththeimplementationofextensive electronicnotificationprocesses. Improvedemployeesatisfaction Improvedabilitytosourcetalentfrommuchbroadergeographic area Increasedcustomersatisfactionbyincreasedresponsivenesseven inharshwinterdays Decreaseditsexpenseratioby7.6%Meaningmoreofeach premiumdollargoingtoitsPolicyholders. Grewrevenueby62%andpolicysurplusreservesby100%.

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

Business&SustainabilityMinor: Milestones&Evaluation
Phase1 Phase2 SeekEmployer SupportandFeedback EvaluateMinorand submitrevisedMinor Reviseenrollmentand admissionsreqs. Developwhitepapers, research,and workshopssupporting minor Basedonsoft moneyevaluate potentialforstudent scholarshipsandfaculty grants Phase3

B.E.&SMinor Approved2012 Applicationbyfirst cohort(Fall2012)

EvaluateMinor Reviseenrollment ConsiderMajorinB&S Addnewcourses WorkwithCorporate sponsors EstablishB&SStudent Organization ConsiderViabilityofB.E. &SInstituteatISU

Contact Information
Jim Jones, CPCU, ARM, AIC, AIS
James.jones@ilstu.edu

Sustainability Blog
www.Sustainabilityriskmanagement.blogspot.com

Microinsurance Blog
www.illinoisjones.blogspot.com

Exposuresintheriskfield
Physical Environment Economic Environment Social Environment Political Environment Legal Environment Operational Environment Cognitive Environment PhysicalAsset Exposures

FinancialAsset Exposures

HumanAsset Exposures

LegalLiability Exposures

RiskField
MoralLiability Exposures

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-releasedetail/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%20Microinsurance%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 Dells 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 Dells 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 Deloittes 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/CFOInsights/38a611f203483310VgnVCM1000001a56f00aRCRD.htm

 ThemissionofthePrinciplesforResponsible ManagementEducation(PRME)developa newgenerationofbusinessleaderscapableof managingthecomplexchallengesfacedby businessandsocietyinthe21stcentury. Leaderswhounderstand

Globalsocialresponsibilityandsustainability. Needforbusinessestomeetsocialand environmentalresponsibilities

GlobalWaterWithdrawals
Irrigationwaterwithdrawal (IWW)andconsumption(IWC) relativetoglobalwater withdrawal(GWW)and consumption(GWC)

Shiklomanov,2000