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Can Insurance Initiatives Help the Environment?


Kathy Baughman McLeod


October 2016

On the Yangtze at various spots in Chongqing (China). Photo © Kevin Arnold
On the Yangtze at various spots in Chongqing (China). Photo © Kevin Arnold

When we think about insurance, we think about covering our financial losses when a disaster or accident occurs. We are willing to pay a premium to protect us.

However, over the years insurance hasn’t just protected us financially; it’s protected us physically—not only playing a critical role in covering our losses, but also reducing our underlying risks and helping solve big societal challenges.

How big fires led to safer cities

Take urban fire for example. During the turn of the 20th Century, fire was a widely recognized risk in city life. In fact, some of the world’s most iconic cities were consumed by fire: Chicago in 1871, Boston in 1872, San Francisco in 1906 and Tokyo in 1923.

During this time, insurance companies were finding themselves too often on the losing end of the deal. As a result, the industry began to demand cities upgrade their infrastructure—more fire alarms, fire escapes and fire hydrants, and new building codes—in order to qualify for coverage. Early fire stations were even owned by the insurance companies themselves.

It was in the insurance company’s and the city’s best interest to focus on steps to reduce underlying fire risk to people and property.

The result? Safer cities, innovative infrastructure and fewer expensive catastrophes.

Buckling up

Another example is automobile safety. We know that simply wearing your seatbelt can reduce the chance of death in a car accident by more than 50 percent. And from the 1970s—when seat belts became standard in U.S.-manufactured cars but usage was low—to today, insurance companies have played a role in advancing their use.

GEICO, for example, asks consumers to “buckle up and drive down your rate.” Their offer: “If you and your passengers always wear seat belts, you could receive a discount of up to 15% off the medical payments or personal injury protection portion of your premium.”

By incenting smart consumer behavior, the insurance industry has helped reduce premium and payout costs and lower the risk of fatal accidents.

Taking on this century’s mega risk

Today, one of the most significant challenges testing society is climate change. Climate impacts are posing new and unprecedented risks on a global scale. Much like the urban fires of the 19th and 20th century, devastating storms, floods, droughts and rising seas are impacting communities that have never seen this kind of weather intensity and destruction before—and many are not prepared.

The insurance industry can play a key role today in helping to minimize this devastation and help society innovate new solutions to reduce climate risks and make people safer.

The positive impacts could be enormous.

And one powerful part of the solution now gaining increasing attention is the role healthy natural systems play in reducing our climate and disaster risks.

This area presents a huge opportunity to not only protect people and reduce costs, but also save and restore nature.

The views seen while snorkling on Lembongan Island. Photo © Kevin Arnold
The views seen while snorkling on Lembongan Island. Photo © Kevin Arnold

Can nature reduce our climate premium?

At The Nature Conservancy, we explore all the different ways that nature benefits people and wildlife. We have more than 600 scientists all over the world studying how nature works, how to protect and restore it and the benefits it brings to people.

We are increasingly exploring the role natural systems like coral and oyster reefs, marshes and mangroves play in protecting communities from storms and floods. And we are measuring their ability to reduce risk and assessing their cost effectiveness.

For example, our scientists have determined that a healthy coral reef can absorb 97 percent of a wave’s energy before it hits the shore—placing a coral’s potential protective services on par with typically more expensive and less flexible built infrastructure, such as breakwaters and seawalls.

In many cases, we are finding that the best risk reduction solution is in fact a blend of “natural infrastructure” and built infrastructure. The Conservancy is working with engineering companies to explore the optimal infrastructure mix in places like the Gulf of Mexico and the Caribbean.

And the insurance industry is also paying attention to this work. Companies like Swiss Re, a global reinsurance industry leader in understanding climate risk, and Risk Management Solutions (RMS), one of the largest catastrophe risk modelers in the market, are beginning to account for nature’s protective services in their risk modeling.

By giving nature a value in risk assessments, they are seeing potential opportunities to stabilize or even reduce losses, and increase the resilience of communities in the face of climate change and increasing disaster risks.

And, as was the case with fire and auto safety, this opportunity will not only pay economic dividends but also make us safer and promote innovative solutions for society.

In talking with Swiss Re’s Vice President of Global Partnerships Alex Kaplan, he pointed to a recent study Swiss Re conducted that found Barbados loses the equivalent of four percent of its GDP each year in hurricane disaster costs. But the study also found that for every $1 spent on protecting and restoring mangroves and coral reefs, they save $20 in future hurricane losses. And remaining costs then become far more manageable through risk transfer.

When I asked Alex what he thought the potential for natural infrastructure was in places like Barbados he said simply, “It’s about allowing economic progress to continue.”

"...The insurance industry has the opportunity to be a leader in not only reducing our climate costs but also making us safer and more resilient."
- Kathy Baughman McLeod

In addition to emerging innovations in risk modeling, the reinsurance industry is playing a key role in United Nations policy discussions for disaster risk reduction (UNISDR) and climate change (UNFCCC) on how insurance can help address climate risk, reduce the cost of impacts to people and livelihoods and increase a community’s resilience.

In fact, just last month (June 2015), UN Secretary General Ban Ki Moon invited the Global Insurance Forum—a group of the industry’s senior leaders—to convene at the UN’s New York City Headquarters to explore climate risk and sustainable development.

This was the first time the entire industry convened under the UN roof on these issues—a significant affirmation of the role insurance can play. And I was able to represent the Conservancy at the table—an affirmation of the role nature can play in our solutions.

We are still in early days of this opportunity, but the answers we seek could be game changers for both people and nature. What if you were able to save money on insurance premiums because you live near a thriving wetland or reef? And what if insurance companies protected wetlands, reefs, mangroves and other natural infrastructure with their own policies to help ensure those systems continue to protect us?

As the world prepares for more expensive climate-related disasters, the insurance industry has the opportunity to be a leader in not only reducing our climate costs but also making us safer and more resilient.

And, this time, insurance has the opportunity to protect nature too.

Nature’s premium is worth it.

Originally Posted on Business Insurance

October 13, 2016