Since the pre-industrial period in the 20th century, increasing human activities were observed across different countries[1]. A larger volume of fossil fuel was burned to support those activities. However, in the meanwhile, burning fossil fuel has led to more carbon emissions, resulting in global warming. Global warming has posed a wide variety of threats to our planet, such as extreme climate, rising sea levels, and pest invasions. Therefore, global warming is a worth-concerning issue. Insurers, who are important stakeholders of the insurance industry as well as the society, should not ignore the impacts of their business on global warming. They should investigate initiatives for optimizing their operations to reduce the effect of global warming. This essay will start with a brief introduction to the underlying factors leading to global warming. Then, several “Go Green” initiatives will be suggested to help alleviate global warming, in terms of policy acquisition, policy management, and claim handling process.

 

Global warming refers to the long-term warming of the planet’s overall temperature[2]. As mentioned in the previous paragraph, carbon emissions from the process of fossil fuel (e.g., coal, oil, and natural gas) burning is the direct cause of global warming. The process emits a huge amount of greenhouse gases (e.g., carbon dioxide) which act like a blanket on the earth's surface trapping excessive heat. Looking into the underlying reasons for the high demand for fossil fuel burning, it is mainly contributed by human activities in terms of transportation, household needs, and commercial needs. Insurers can help cut the demand for fossil fuel because property and casualty insurance with coverage mainly focuses on vehicles and homes are closely related to the aforementioned human activities. Furthermore, global warming has led to stronger and more frequent natural disasters, such as severe hurricanes and extreme heat. Insurers can no longer merely consider individual catastrophic events but the interactions between human activities and the global climate. The expected loss for property and casualty business would keep increasing if the issue of extreme climate is becoming more severe. That is why all insurance companies should be looking at their operations to ease global warming.

 

To start with the policy acquisition stage, insurance companies can implement innovations in the marketing and underwriting process. Traditional ratemaking mainly depends on the expected incurred losses based on features of the insurable object, administrative expenses, as well as underwriting profit and contingency provisions[3]. These drivers for the ratemaking process do not take into consideration of any environmentally friendly designs or measures related to the insurable objects, which could indeed help reduce the energy required and thus achieve the goal of cutting the demand for fossil fuel.

 

For the marketing campaign, insurers could provide discounts for properties with environmentally friendly designs. Insurers could consider introducing premium reduction clauses for their property and casualty insurance. Take motor insurance as an illustration, premium discounts could be provided for low-emission or electric vehicles, which emit a far smaller amount of greenhouse gases compared with traditional cars. For homeowner insurance,  premium discounts could be imposed for policy on green buildings (e.g., buildings with eco-friendly construction materials, solar panels ,or LED lighting[4]), which contribute to cutting down the electricity demand. This initiative is expected to be attractive to policyholders because premium reduction acts as a financial incentive. Vehicle insurance owners are encouraged to purchase and use alternative-fuel vehicles to lower carbon emissions, while homeowners are encouraged to adopt the environmentally friendly design for their property to cut back electricity consumption, lowering the demand for fossil fuel burning and hence carbon emissions. Looking into the insurance market, insurance with similar concepts as the above initiative could be found. AXA is selling vehicle insurance with discounts for low-emission and hybrid vehicles, and commercial insurance with discounts for enterprises using green energy (e.g., solar and wind power). Donegal Insurance Group is selling homeowner insurance with discounts for ground-source heat pumps or solar[5]. These existing policies with premium discounts prove the feasibility of the initiative.

 

For the underwriting process, insurers could charge a lower rate for lower carbon emissions, and vice versa. Regarding motor insurance, rates could be correlated to the previous year’s carbon emission level, which can be derived from the travel distance record submitted by the insurance buyers. Regarding homeowner insurance, rates could be dependent on the electricity consumption level, which can be easily obtained from the electricity meter readings. Same as the premium reduction marketing strategy, linking rates with energy consumption acts as a financial incentive, encouraging buyers to devote efforts to controlling carbon emission and electricity consumption level. The above strategies could also be applied to policy renewal for determining next year’s rate. On top of acting as a financial incentive, there exists a side benefit of alleviating the issue of adverse selection for vehicle insurance. Adverse selection refers to the tendency of those with a higher possibility to involve in accidents to purchase insurance[6]. However, with rates linked with carbon emission levels, buyers who use their car less frequently than average (i.e., carbon emission level is likely to be lower than average) would be attracted due to the appealing rate. Those drivers drive less, so the possibility of accidents is also lower, and hence a lower probability of submitting claims.

 

Apart from initiatives during the policy acquisition stage, innovations in the policy management stage could also contribute to alleviating global warming. Suggested actions include digitalization of policy management and carbon offsets arrangement.

 

For the digitalization of policy management, insurers should fully adopt the paperless approach. Traditional insurance management involves lots of paper documents due to stringent regulations which ask for a huge amount of documentation, such as application forms during the selling process and proof documents during the underwriting process. The excessive consumption of paper indeed intensifies global warming. Converting a single tree into paper results in a considerable amount of carbon emissions. Moreover, trees are absorbers of carbon dioxide, which help remove greenhouse gases hence alleviating global warming[7]. Using too many papers contributes to global warming, so insurers are suggested to go paperless. Besides digitalizing the policy acquisition process by online application systems, a reliable database should be established to store clients’ data, from sales documents to underwriting approval records. Fully digitalization becomes feasible in today’s era with technologies in blockchain and cloud-based enterprise content management, allowing insurance companies to effectively acquire, organize, store, and deliver critical information to its business stakeholders both inside and outside of the firm[8]. 

 

In addition, insurers could consider carbon offsets arrangement. The carbon offset amount could be calculated based on the vehicle and annual driving distance information provided by the policyholders. Insurers would then purchase carbon offsets to cover the emissions produced by policyholders’ cars. The fund could be used for improving environmentally friendly facilities to cut carbon emissions from human activities. The fund could also be used for planting trees, which contribute to easing global warming by absorbing excessive carbon dioxides. Besides the direct advantage mentioned above, carbon offsets arrangement is a way to show the company’s concern on the global warming issue, acting as a role model for its policyholders and the society. Take the carbon offsets arrangement from AXA as an example, they offset carbon produced by the cars they insure at no extra cost. They partner with “The Nature Trust” who uses the funds to plant 600,000 trees in Ireland. This will create new Irish forests capturing carbon dioxide from the atmosphere and provide public access to green spaces for future generations[9].

 

On the other hand, insurance companies can “Go Green” on the claims handling process, including digitalization of claim applications and free upgrades to environmentally friendly properties.

 

Same as the selling and underwriting processes, a lot of paper documents are required from the traditional claiming process. In today’s technological era, insurers should shift their claiming submitting process from offline to online. E-billing should also be implemented to reduce the need for paper documentation. Digitalization of claiming process aims at cutting down paper usage so as to reduce carbon emissions during the production of paper and retain more trees for greenhouse gases absorption. Many insurance companies have already adopted digital claims submission system. Possible advancement could be introducing an AI-assisted chatting system, offering anywhere and anytime access for customers.

 

Apart from that, insurers should consider offering free upgrades to environmentally friendly properties. Traditional property and casualty insurance include repair and replacement of the damaged property. In case of replacement, the new property usually has a similar estimated quotation as the damaged property. In order to promote using eco-friendly equipment with lower carbon emissions, insurers could replace the damaged energy-inefficient properties with environmentally friendly properties, without collecting any additional premium. This initiative is feasible as there are similar schemes in the insurance market. For instance, Allianz and Erie Insurance Property & Casualty Company offer free upgrades to energy-efficient alternatives in the event of unrepaired damage[10].

 

To conclude, global warming has brought serious environmental threats to our planet and the issue becomes more severe with the increasing human activities. Insurance companies, whose businesses are closely related to human activities and greatly affected by environmental threats, should be looking at their operations to minimize the effects of global warming.  Insurers could introduce several initiatives at the policy acquisition, policy management, and claims handling stage, including premium reduction marketing campaign, ratemaking innovations, digitalization of insurance management, carbon offsets, and offering free upgrades to environmentally friendly properties. All initiatives aim at reducing the demand for fossil fuel and lowering carbon emissions, and hence alleviating the issue of global warming.

 

[1] NASA. (2022). Overview: Weather, Global Warming and Climate Change. Retrieved from https://climate.nasa.gov/resources/global-warming-vs-climate-change/

[2] National Geographic. (2022). Global Warming. Retrieved from https://www.nationalgeographic.org/encyclopedia/global-warming/

[3] CAS. (2021). (Statement of Principles Regarding Property and Casualty Insurance Ratemaking. Retrieved from https://www.casact.org/sites/default/files/2021-05/Statement-Of-Principles-Ratemaking.pdf

[4] CADPRO. (2022). Green Building Designs. Retrieved from https://www.cadpro.com/green-building-designs/

[5] California Department of Insurance. (2022). Climate Smart Insurance Product Search. Retrieved from https://interactive.web.insurance.ca.gov/apex_extprd/f?p=142:1:6588326829177::NO:::

[6] Investopedia. (2021). Adverse Selection. Retrieved from https://www.investopedia.com/terms/a/adverseselection.asp

[7] Paperless Productivities. (2022). Economical and Ecological Benefit with Paperless Productivity. Retrieved from https://paperlessproductivity.com/eco-impact/#:~:text=Going%20paperless%20helps%20to%20reduce,able%20to%20absorb%20C02%20gasses.

[8] TechTarget. (2022). Why your business needs to consider cloud-based ECM. Retrieved from https://www.techtarget.com/searchcontentmanagement/tip/Why-your-business-needs-to-consider-cloud-based-ECM

[9] AXA. (2022). Carbon Neutral Car Insurance. Retrieved from https://www.axa.ie/climate/carbon-offset/

[10] California Department of Insurance. (2022). Climate Smart Insurance Product Search. Retrieved from https://interactive.web.insurance.ca.gov/apex_extprd/f?p=142:1:6588326829177::NO:::