Changing minds in the insurance industry: a conversation

Positive Mavericks, Institutions

Preventable Surprises invites perspectives from positive mavericks across economic sectors. Who are the agents of transformation? What do they think? Today, New Yorker Walter Murphy (WM) & Mumbaikar Praveen Gupta (PG), two ex-insurance executives from different parts of the world, ruminate on personal perspectives and what holds back insurance from throwing its weight behind mitigating the climate crisis. ESG made them friends. 

WM: My third-grade science project was about building turbines off the coast of Staten Island – where I grew up – to harness wave power to generate electricity.  My eighth-grade science project was about greenhouse gases warming the earth.  I used dry ice in Coca-Cola bottles to simulate CO2 emissions and measured the rise in temperature.  Little did I know that thirty years later my Coca-Cola bottles experiment would now be the biggest threat to our existence.

I am intrigued by how we evolve as human beings and how we can improve our lives and the planet we live on.  I live in New York – a city in constant change ever since Henry Hudson floated into the harbor back in 1609. The only way we can reverse the ravages of climate change is through monumental change via technology, public policy, private financing and mass mobilization.

PG: My interest in ESG has evolved via my school time interest in ecology and wildlife. I became a life member of World Wildlife Fund – India, by contributing from my first ever salary some 40 years ago.

It all started with Tobacco! Remember the tobacco companies were faced with activism and legal action for causing serious health issues? Then came California action against auto manufacturers responsible for Green House Gas emissions (GHGs). I used to live and work in Hong Kong when the last two developments were panning out. These influenced my writing. The theme was around the need for insurers to be activists. I would run my work past eminent friends, some of them were very bright and successful lawyers. They were polite – appreciated the concept but assured me that such things would never ever happen in our lifetimes!

WM: I worked in Washington for five years (1995-2000).  Our system of government was ineffectual back then and has now completely sputtered to a halt.  The election of Donald Trump and his administration has done nothing but propel us backwards in every way imaginable.  I feel that the rise of the youth in America and around the world to raise awareness to climate change, diversity and inclusivity is the only way we can reboot our political systems and many of the 20th century world organizations who have become completely stagnant.  The passion and exuberance of the youth excite me, and they already have made great strides in moving the needle on several issues.

My insurance career was based primarily in product development and compliance.  Although, I did well for the most part I grew weary of the minutiae of the job.  I did not see how my job was improving the lives of others.  People equate insurance with sales – selling life insurance or auto policies.  I think most people do not have a clear grasp of the breadth of what insurance entails.

Insurance companies are going to have to really find revolutionary new ways to attract the future generations. Perhaps InsurTech will be the way to go in the future to attract young people. There is so much competition out there that the industry needs to find a way to distinguish itself.  A much more active lead in ESG, climate change and social issues of the today and the future would be beneficial to the industry.  Today’s youth is not interested in company cars, corner offices and the traditional perks that dominated the working environment that we grew up in.  They want to embrace new ideas and new technology.  The insurance industry, in my opinion, is way behind the curve when compared to other financial and tech companies that are prospering.

PG: When I started in the insurance industry – one of the things we used to be constantly indoctrinated with was that ‘insurance is a handmaiden of the industry‘! I abhorred the very thought and the idea. So, I have always wished that Insurance should chart its own destiny and should find a way to mainstream in the popular narrative.

My explorations with Diversity & Inclusivity (thanks as well to my Institute – Chartered Insurance Institute, UK) made it very clear that insurance in its totality is mightily diverse. However, it resists inclusivity. Perhaps that comes in the way of penetrating any marketplace beyond a certain level. That is a function of low trust as well. Last but not the least, it comes in the way of hiring the brightest minds! Imagine telling young people – come and join us – we will help you safeguard this planet’s environment and make it a great sustainable world for all of us. However, somehow, we do not seem to believe we have anything to do with the overall environment! It could be such an outstanding value proposition for prospective employees!

WM: Post September 11, the U.S. Congress passed the Terrorism Risk Insurance Act (TRIA) which provided a backstop for insurance claims related to acts of terrorism. This terrorism coverage essentially is a public/private risk-sharing partnership that allows the federal government and the insurance industry to share losses in the event of a major terrorist attack and ensures that adequate resources are available for businesses to recover and rebuild if they are the victims of a terrorist attack. Under TRIA all property/casualty insurers in the U.S. are required to make terrorism coverage available.  It has been very successful and has been reauthorized ever since.   Perhaps this could be something that could be done for climate change?  Since climate change affects everyone, perhaps the industry could collect a percentage of premium for climate change related risks?  The money collected could be pooled and used to invest in climate change benefitting technologies or investments such as green bonds.  Another idea is to add a climate change expense when developing rates:  the insurance industry develops rates by analyzing historical settlement costs. It then uses statistical models which factor in administrative costs and overhead that are added to their base rates.  The final rate is the actual cost required to cover a claim.  The insurance industry could work with regulators to devise an acceptable climate change factor, determined by current data and analytics. Applied to rates, it would generate additional capital that could help the insurance industry handle the accelerating and from now on perpetual costs of climate change.

PG: India is the world’s third largest polluter. We have some of the worst polluted cities in the world. When I raise the issue of poor air quality in conjunction with implications for health underwriting – that raises many an eyebrow! It is such a great opportunity for insurers to work upon.

While insurers may believe they are the center-stage of our business, there are so many parallel theatres running – be these around distribution – predominantly broking in corporate / commercial lines. Underwriting profitability takes a back seat. Pricing is a mockery: externalities (including climate change masked as natural catastrophe or Act of God) are never factored into pricing. Insurance offering has become so commoditized that exposure is not adequately taken under consideration, more so in emerging markets like Asia which are increasingly affected by climate change related events. Asbestosis nearly brought the Lloyd’s to its knees. What ought to be a grey rhino is made out to be a black swan! Valuation of insurance entities is like steroids that many in the industry get addicted to. It’s growth at all costs. There is a creamy layer which makes money while everyone else loses out.

We remain obsessed with predictability and at best we are reactive. InsurTech seems to be a remedy for it all, but there is too much noise around it. The real signal tends to get missed! As a result, we continue missing out on the Moment of Truth by focusing too much on sales, at the expense of service delivery. It’s the classic small print issue. Fresh minds, out of the box thinking and technology could truly transform the internal climate of the insurance industry for it to successfully take on the Climate Crisis!

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