Dr Walter Jakobi describes the environmental initiative developed by the insurance industry in co-operation with the United Nations Environmental Programme.Climate change is a well acknowledged fact today, and insurance companies are deeply involved. One result has been that four years ago in September 1995 in Cologne six insurance companies finalised an environmental statement, half a year after a first gathering in Oslo. Sixteen companies signed this document in Geneva in November that year. As of now, 87 companies from 27 countries have joined.

An association has been founded to share best practices, to develop activities in respect of climate change and asset management and to support research in these issues. Member companies mainly come from Western Europe and Asia, in particular Germany, Switzerland, Great Britain, Japan and Scandinavia. France is so far under-represented, as are the United States and Canada.

The United Nations Environmental Programme (UNEP) gives substantial support and hosts this initiative, as well as that of the banking industry. It is UNEP's declared policy to co-operate with businesses as well as with political, governmental and non-governmental institutions.

Climate related disasters are similar in danger to insurers as environmental liability losses, such as asbestosis or toxic waste sites. They insure weather-related perils like windstorm, flood, hail, winter freeze or avalanche disasters. These losses amount to billions of dollars every year and are set to grow steadily (see graph). The largest insured property loss so far was Hurricane Andrew, costing $17 billion in 1992. Loss scenarios of a hurricane activity in the Gulf of Mexico heading into Florida could easily cost $50 billion or more, not far below a potential earthquake loss in California or Tokyo bay.

Even greater than insured claims are the economic losses following weather disasters in countries like Honduras, China or Bangladesh, not forgetting the enormous economic burdens under government flood schemes as in the US. This can be seen as a threat to the insurance industry, which might come under pressure to give wider cover. Time will tell whether this could also be interpreted as an opportunity from new demand. The greatest concern of insurers today is the flood peril, be it regional or along whole river systems, as well as heavy storm events.

The statement
The UNEP Statement for the Environment addresses all functions of an insurance company. The most important areas are:
• Risk management, product design and pricing.
• Claims management.
• Asset management.
• House keeping.

While risk and claims management is widely acknowledged as an environmentally proactive attitude and good housekeeping is almost a matter of routine, asset management is still emotive. Investment funds are, however, more and more designed to match environmental friendliness on top of the normal benchmarks of profitability and security. Such investments are only a fraction of the world's financial market yet but ever growing. Banks, for instance, and other investors are increasingly interested in lending money to businesses which are, in effect or in the opinion of people, environmentally friendly.

Businesses can no longer deny that it pays off to set up and follow through a proper environmental policy and to observe ethical and social concerns. Environmentally unfriendly companies will loose clients' respect. As a consequence, they will loose market share and ultimately profitability. This situation is valid for insurance companies as well, although they are almost “clean” producers of security in contrast to some manufacturing industry.

Property investments
Coming back to asset management, insurance companies invest and re-invest huge amounts of money every year. Investors into housing and office blocks consider today energy saving as a major aspect of projects in Germany, Scandinavia, Switzerland, as well as the new “erotic gherkin” project proposed in London. I remember a conference in Cologne in 1997 when various industries presented their energy saving and water or waste recycling experiments. These paid off regularly, with a return on investment of only three to five years.

Many of these measures are, however, small-scale developments. To convert huge office blocks or the rental property of insurance companies along these lines will take many years. It is encouraging that the process has started. One has to reflect for a moment on the question: Why invest in energy saving, when the tenant will pay anyway, the net return on investment being unchanged, at least immediately? It takes a second look to realise that in the long run tenants will certainly monitor service charges as well and will start to react favourably to sustainable foresight.

This little example also tells how sensitively communication between insurers and environmentalists must be conducted. All parties should not hesitate to listen rather than to shout.

Loss prevention
The UNEP Insurance Initiative has since its foundation held a number of conferences and has, in conjunction with two conferences of the parties of the Rio Convention of Climate Change, issued position papers. In the international political scene, the insurance industry is respected as one of the few business sectors to take the matter seriously and proactively.

Politicians and environmentalists value insurers' loss prevention ambitions, not only in relation to potential property losses but also to environmental pollution. Every fire and every oil spill, which is prevented, is a gain for sustainability. The UNEP Insurance Initiative has great relevance in making these aspects clearer to the various stakeholders.

Insurance companies may say that they “do it already” and need not sign a statement. This is principally correct, but a little too simple. It is different when one commits oneself publicly to sustainability and adds to the lobby potential for the environment. This care goes much beyond climate change; it relates to the many resources to be “saved”, in the insurance industry as well as among our clientele, be it private motorists adhering to a mileage tariff which encourages the occasional driver, or be it a business running a paperless office.

The Cologne conference of the initiative in June 1998 set the pace for a design of environmental tools for insurance companies. A paper that described the possible contributions of insurance companies in the post-Kyoto markets has now been published by UNEP. Similarly, a discussion on data needs and formats for insurance and investment enhanced the development of environmental standards and metrics. A paper on CO2 indicators that was presented during the conference has meanwhile received great attention and support in governmental circles.

The Oslo conference in June 1999 assembled again some 130 experts from 15 countries to proceed a step further and share experience on:
• Climate change and the role of the financial sector.
• Best environmental practice in insurance companies.
• Indexing - the answer to every insurer's environmental investment needs.
• Communicating sustainability.

What we can do
As already mentioned, insurance companies are trading as a fairly clean industry. This makes them by no means less vulnerable to hostility. Confrontation often derives from a misunderstanding of the insurers' economic functions. They are a service industry to many other industries and private citizens. They cannot take over the function of environmental police, but can involve themselves in lobbying for the environment.

Insurers have immense experience in loss prevention and risk management in almost every economic sector. They are skilled in handling mass claims events, like storms or flood disasters. Their worldwide connections and close co-operation with local rescue institutions like fire brigades, and administrative skills in disaster mitigation is of attraction to designers of environmental policies. The participation of any best practising company in this process is not only desirable, but absolutely vital.

While prominent reinsurance companies are well represented as signatories to the environmental statement, large national and international insurance groups still have to reflect.

Insurance companies are in touch with so many other stakeholders in the environmental future that they should take more proactive measures. The political process of the Rio Convention, followed by the Kyoto Protocol of 1997, will give enough opportunity for such involvement. The initiative already co-operates with other institutions like the World Business Council for Sustainable Development (WBCSD) and the Global Reporting Initiative (GRI) on standardising environmental reporting. Members of the insurance and the banking initiative have meanwhile joined forces to set up a venture capital fund to invest in environmentally friendly businesses.

Another area of caring for the environment may be education. Insurance companies could promote education in loss prevention and environmental care, thereby enhancing precautions for the future, which insurance is all about. First attempts in this respect have been undertaken in the United Kingdom as well as in other countries. Emphasis should lie on climate change issues as well as on saving resources in general.

These are just a few examples of activities the members of the insurance initiative are involved in. What remains to be done is to promote the idea and make the processes more transparent. People must trust that most often a little plant will grow into a large tree one day.

Dr Walter Jakobi is managing director of Gerling Global General & Re, London, and has been closely involved with the UNEP Insurance Initiative for the Environment since its beginning.

The papers mentioned above Creating a Standard for a Corporate CO2 Indicator and The Kyoto Protocol and Beyond: Potential Implications for the Insurance Industry are available from UNEP, 15 chemin des Anemones, CH - 1219 Chatelaine/Geneva, Switzerland (Tel. +41 22 917 8178, Fax +41 22 796 9240). The latter is also available via the internet at www. unep.ch/eteu/envr-fin.htm