How might insurers achieve a ‘higher bottom line’?
Insurers may need to revise goals and strategies to address the growing array of social and economic challenges.
Over the years, I’ve often heard insurance company leaders characterize the industry’s primary role as being the economy’s financial first responders, helping individuals and business owners recover, rebuild, and hopefully thrive after catastrophic losses. That’s why a recent clarion call for financial services companies to aspire to “a higher bottom line” should naturally resonate with this sector, both in terms of adapting to a rapidly changing economy as well as in addressing several vexing societal problems.
Insurers are already the economic linchpin for many policyholders and even entire communities at times of severe stress, covering millions of claims from climate-related disasters, civil unrest, cyberattacks, and workplace discrimination, among many other emerging exposures. Insurers have also been proactive in keeping people and properties safe, working with individual customers to bolster loss mitigation while uniting to support society-wide risk management projects via groups such as the Insurance Institute for Highway Safety and the Insurance Institute for Business and Home Safety.
Still, given all that’s happened in the past couple of years and even more fundamental disruptions likely to come in this decade and beyond, perhaps insurers should consider some repositioning to accomplish even more. How might they revise goals, strategies, products, and business models to address the growing array of social and economic challenges customers face, individually and collectively — all while maintaining profitability?
These are some of the key issues raised in a paper from Deloitte’s financial services practice, in which co-author Monica O’Reilly, U.S. financial services industry leader and vice-chair at Deloitte LLP, writes that to move forward in the post-COVID 19 environment, companies should “go beyond recouping lost profits by addressing major societal issues, nurturing new markets, profiting in collaboration with multiple stakeholders — and most importantly, putting consumers at the center of everything they do.”
The timing of Deloitte’s paper comes at a particularly volatile moment in U.S. and world history, going beyond COVID-19 concerns. Indeed, the devastating loss of life and economic upheaval caused by the pandemic came amidst many other major disruptions.
For one, there’s the accelerating emergence of new technologies and data sources, raising additional cybersecurity and privacy considerations. Meanwhile, the ways many of us often work and utilize our personal property for commercial purposes in the gig economy has also changed the landscape for home, auto, and workers’ compensation insurers. Last but not least, there are growing concerns about income inequality, the financial needs of underserved segments, and urgent calls for greater equity and inclusion in terms of both gender and race for the life insurance and property & casualty industries to address.
Under such disruptive conditions, many financial services firms, including insurers, are being challenged to rethink their roles and reimagine how they might keep up with changing needs and expectations, whether involving their customers, regulators (domestic and global), rating agencies, or their own socially-conscious investors and employees. “Financial institutions will be called upon to rebuild public trust, contribute to a more just and sustainable world, and build a more equitable financial services industry where profit and societal impact coexist amicably,” O’Reilly predicts in her introduction to the Deloitte report “A higher bottom line: The future of financial services.”
But can insurers accomplish these laudable goals without sacrificing profitability and risk shortchanging shareholders? Deloitte’s financial services industry leader believes they can and indeed must try, given the confluence of events altering consumer and investor priorities, attitudes, and behavior. This “ imperative for change,” O’Reilly wrote, should be seen as “an opportunity for financial institutions to positively affect society without negatively affecting profits. This belief guides our vision for the future and inspires us to redefine the bottom line.”
Indeed, the bottom line should no longer be considered “just the sum total of profits and losses,” she added. “A higher bottom line values the future of our planet and people just as much as profits. It blurs the line between the striving and the successful until there’s less inequality and more shared wealth. In short, our vision is one of a higher bottom line that represents both the financial and human profit to be gained from a more educated, equitable, sustainable world.”
So, what steps might insurers consider taking to realize this grand vision?
The heat is on over climate risk
One glaring example is how to deal with climate risk. As the industry that often pays to clean up a good deal of the damage done by windstorms, floods, and wildfires, insurers have long been advocates for adaptation measures, such as stronger building codes and land-use regulations. They have also supported risk management research — for example, demonstrating the value of doing something as simple as making sure exterior doors open out of, rather than into homes, to better seal and protect dwellings during high winds. The Insurance Information Institute has a Resilience Accelerator program to call attention to and help coordinate such efforts while seeking to spur loss control innovation.
However, most U.S. insurers, in general, have not been nearly as engaged in efforts to limit the likely causes of climate change, rather than just trying to lessen its aftermath. Back in 2015, insurance leaders from around the world gathered at the United Nations in New York for a summit on the subject. As I reported here, they were challenged to find ways to leverage their vast resources and risk management expertise to bolster sustainable development and their profitability at the same time. They were urged to speak out more forcefully with local governments and private industry about mitigating climate risks at the source. There were also calls for more innovative solutions to help close the protection gap between the damage being done and how much of that is insured, along with pleas to revise their investment portfolios to support the transition to more sustainable energy sources.
Unfortunately, progress has been relatively slow since that UN Summit. For example, Aon reported that only $71 billion of the $232 billion in economic losses caused by natural catastrophes were insured in 2019, leaving a protection gap of 69%.
Similar themes dominated the 2017 International Insurance Society Summit in London, where several speakers encouraged insurers to play a bigger role in climate change mitigation. But as I reported here from that meeting, speakers from European carriers that were already actively engaged in trying to lower carbon emissions expressed consternation about how effective their efforts could be without more robust support from their US counterparts. The time appears to be ripe for change, given that shifts in the US political environment have once again placed climate risk on the front burner.
Meanwhile, a growing number of U.S. insurers have been appointing chief sustainability officers or their equivalent to coordinate and report publicly on progress in addressing not just climate risk but initiatives to enhance diversity and inclusion as well. Setting environmental, sustainability, and governance goals and being transparent about efforts to meet them is a solid step forward since what gets measured and disclosed is more likely to get done. But insurers will have to make sure such initiatives ultimately amount to real change or risk having their efforts dismissed as greenwashing.
Insurers don’t have to act alone
Another example is how insurers might address the elephant in the room — coverage, or lack thereof, for many pandemic-related losses. As claims poured in from businesses large and small that were closed or limited by government safety orders involving COVID-19, the industry was quick to point out that most commercial insurance policies were not written to cover such losses, and in fact, were often specifically excluded.
This wasn’t arbitrary or an oversight. Since viral events damaging everyone at once would undermine the spread of risk enabling insurance to remain viable in the first place, such exclusions make sound business sense, even though it might have left many policyholders without coverage and prompted scrutiny from state lawmakers. Still, while US insurers may have won most of the court cases decided thus far over property coverage restrictions for COVID-19 claims, these might end up being pyrrhic victories if they result in reputational damage and/or prompt new regulatory actions in response.
It’s encouraging to see that while insurers may not be able to cover most COVID-like claims on their own, the industry is pursuing alternative solutions. Many carriers and their associations have already been active in calling for a public-private approach to cover future pandemic losses through a facility similar to the federal program handling another challenging societal risk — catastrophic terrorism events. The Terrorism Risk Insurance Act and subsequent extensions through 2027 created a federal backstop, making primary coverage available by capping individual insurer and industry-wide losses in the most severe catastrophes.
Change is likely inevitable
…So it’s better to lead now than be forced to follow later.
Whether the challenge is climate risk, pandemics, workplace and economic equity, or social injustice, the heat will likely be on insurers and others in financial services to provide more innovative solutions and adapt their own operations accordingly. But given what we’ve all gone through in the past year, insurers should feel up to the challenge.
The pandemic forced most insurers to make dramatic changes overnight in their operations, enabling an entirely remote workforce while digitizing and virtualizing nearly all of their interactions with intermediaries and customers. If nothing else, this demonstrated how agile and adaptive this industry can be when the chips are down. That same imperative to address a variety of societal problems, driven by rising stakeholder expectations, should prompt insurers to consider significant shifts in how they do business. Just as with the pandemic, innovative thinking, agility, open-mindedness, and decisive action will likely have to be front and center.
In Deloitte’s paper, O’Reilly urges financial services companies to “think boldly and innovate ambitiously,” as well as look to “not just prosper in the future, but to define it.” She concluded her introduction with the hope that the industry will “embrace this perspective not just for the business imperative it outlines, but also for the opportunity it presents to lead the way to a more just, equitable, and sustainable future for all. And elevate your bottom line until it’s one that truly sets your business apart.”
Former NU Property & Casualty magazine Editor-in-Chief Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader at the Deloitte Center for Financial Services. These opinions are his own.
This piece is published with permission from Deloitte and may not be reproduced. See www.deloitte.com/about to learn more about Deloitte’s global network of member firms.
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