Act on climate change now, says Serge Callet of Accenture. It will be good for business.

Eighty-nine per cent of global insurance equity analysts surveyed by Accenture this year rated “climate change and other environmental issues” as critical or important challenges in the next three years. So there is impetus within the sector to confront the strategic demands posed by global warming.

Climate change is one of the most important long-term challenges for the property and casualty (P&C) insurance industry. Underestimating the effects and the risks presented by this phenomenon could lead to a dramatic increase in costs for insurers and their clients.

Climate change will hit many aspects of an insurance company, but it will have the most profound effect on underwriting, as mispricing the risks could become incredibly costly to the industry. For this reason, Accenture believes now is the time for insurers to go through a strategic review of their underwriting capabilities. Companies must evaluate their ability to:

• Look at risk criteria and severity, together with the need for frequent assessment of climate change driven by new catastrophe modelling

• Understand risks associated with violent weather – including declining predictability and rising intensity – that require a sharpening of underwriting skills

• Apply pricing based on future assumptions, not just historical patterns of loss.

In addition to this, insurers should exploit their important position in society to foster actions that address the climate change problem, as they have successfully done in the past with risk related to fire or earthquakes.

They have a unique opportunity to contribute to and encourage sustainability initiatives and low-carbon economy drives among clients. Carbon emissions from cars, factories and buildings represent a significant share of total emissions and could be drastically reduced by targeted actions (hybrid cars, green buildings and so on).

Revised pricing approaches can have a positive effect – such as new debit and credit policies aimed at getting customers to adopt greater energy efficiency, carbon emissions management and other initiatives to reduce carbon footprint. Insurers such as the Green Insurance Company are already offering lower premiums for owners of hybrid or other low-carbon-emission cars.

Also, programmes can be introduced to encourage customers to implement specific initiatives to reduce climate change risk. Insurers can offer services related to risk assessment/audit and recommendations in this new area.

While incentives such as lower premiums for owners of hybrid or other low-carbon cars are already in place, there is much larger scope for the implementation of sustainability measures.

Given the increasing popularity of “green” behaviour, insurers have an opportunity to expand their business by launching innovative products and services targeting customers eager to use clean energy, live in green houses and so on. In addition to the environmental benefits of such actions, sustainability can become a selling point to differentiate within a market that is becoming more and more competitive.

Differentiated actions of this nature generate a range of benefits for insurers that orchestrate them well. Improved customer retention and growth, revenue growth boosted by new services and improved brand proposition are some of the customer-related advantages.

There are benefits for the insurance company’s employees as well. The insurer becomes more attractive to talented recruits, moving away from a traditional “dusty” image towards a modern and responsible corporate image, which is certainly important. Better alignment with government policies and with the increasing influence of regulators is another advantage.

Climate change will induce less predictability in underwriting income and increase the financial pressure on insurers.

In the most fragmented markets, such as the US P&C sector, it will help accelerate the insurance market consolidation that is expected as a result of the financial crisis.

In a world where change seems to accelerate and gain stronger momentum, the insurers need to understand this new force now and define a clear strategic response. We believe insurance companies could learn from successful strategic sustainability programmes executed by multinationals in other industries.

The eco-constrained industries, in particular, have come under pressure from regulators. They have had to implement drastic changes in their operating models and processes in order to dramatically reduce their own emissions or the emissions of their providers.

This is the case in the chemicals industry, for example. Rhodia, a French speciality chemicals business, has made the deliberate choice to differentiate its business by positioning around its sustainability programme, implementing internal indicators and ambitious initiatives to manage risks and reduce emissions.

By making sustainability a priority within business strategy and implementing the complementary reforms, the insurance industry has a unique opportunity not only to expand its business but also to contribute to a better world for the next generation.

Serge Callet is global managing director of Accenture’s insurance practice.