Finance

sharing of risk, with the global pooling of what would be risks otherwise borne solely by individuals and entities estimated at roughly US$ 400 trillion (UNEP FI IWG 2009). As this risk pooling is integral to the efficient functioning of markets, economies and societies, the insurance industry is a key focus of regulators and policy makers. The risk pooling afforded is only possible with investors’ willingness to put capital at risk; hence, value creation is necessary for its continued existence. The convergence of public and private interests in the insurance industry is nowhere more apparent than in the risks and opportunities presented by ESG issues.

The insurance – including reinsurance – community, with its expertise in assessing, pricing and managing risk and freeing the flow of risk capital, can play a critical role to support the emergence of a green economy agenda across business, industry and the markets. It is important to understand that insurance is not only a risk transfer mechanism to compensate financial losses, but also a risk management mechanism because insurers carry out loss prevention and loss mitigation measures in conducting their business. The insurance industry, therefore, has an unparalleled capacity to understand and engineer approaches and mechanisms to manage emerging ESG risks.

As such, the industry is a strong lever for the transition to a green economy due to its size, the extent of its reach into the community and the significant role it plays in the economy, not only in the risk management and risk transfer spheres, but also as an investor through the vast pool of insurance company reserves. In 2008, worldwide premium volume for life and non-life insurance business combined exceeded (Swiss Re 2009) US$ 4.2 trillion, making insurance the largest industry in the global economy. The industry’s global AUM in 2010 stood at US$ 24.6 trillion (TheCityUK 2011). Table 6 highlights the premium make-up of the global insurance industry in 2008, and also gives an indication of the insurance gap between developed and developing regions.

The insurance industry has long been in the vanguard of understanding and managing risk, and has served as an important early warning system for society by amplifying risk signals. For example, the insurance and reinsurance community were amongst the first financial service organisations to engage in and explain the long- term economic risks posed by climate change (UNEP FI 1995). In addition to the threats posed by global warming, insurers today are communicating strong risk signals stemming from a wide range of ESG issues such as biodiversity loss and ecosystem degradation, water scarcity, poverty, emerging manmade health risks, ageing populations, child labour and corruption (UNEP FI IWG 2007). Because certain risks are too large to be borne by an individual insurer, these risks are

spread across the industry in a complex risk-sharing system comprising of many players, with the underlying principle of “one for all, all for one” that has supported social and economic development throughout human history. Insurers, reinsurers and retrocessionaires, are all risk carriers, as they put capital at risk and ultimately pay claims. Insurance agents and insurance brokers provide services to insureds and insurers. Similarly, reinsurance brokers and reinsurance underwriting agents provide services to insurers, reinsurers and retrocessionaires. The common denominator for agents and brokers in the system is that they are all intermediaries who act as channels in spreading risks. There are other service providers, such as catastrophe model vendors, loss adjusters, and rating agencies, but they are not directly involved in the risk-sharing process.

Over the last two decades, the insurance industry has also witnessed the emergence of insurance-linked securities, such as catastrophe bonds, where risk carriers have transferred peak risks in their portfolios to the capital markets by securitising, for example, their accumulated risk exposure in a specific territory due to natural hazards. Through loss prevention and mitigation, carrying risks, and as major investors, the insurance industry has protected society, catalysed finance and investments, shaped markets and underpinned economic development. However, the importance of the insurance industry as a driver of a green economy is poorly understood by policy makers, the broader business community and the wider public.

Uniquely positioned to understand the fundamental nature of emerging risks to communities, the global economy, whole industry sectors and its own investments, the insurance industry is now starting to explore the commercial

viability of conceiving,

developing and rolling out new products and services that address global sustainability issues (UNEP FI IWG 2007). The insurance industry is also beginning to realise the potential of microinsurance – insurance for low-income people – as both a prime business opportunity and a powerful tool for financial inclusion and sustainable development. Potential new markets include insurance for emerging manmade health risks and the protection of natural resources, in particular, biodiversity and ecosystems (e.g. forests) and water. The insurance industry is also awakening to the fact that acting sustainably, as in the cases of internal resource efficiency and the recycling of damaged assets, saves money and is a concrete way of leading by example (see examples in Box 8).

Clearly, insurance companies are unique entities. Their insurance and investment operations are highly intricate systems, with many players and functions, creating an industry that is not readily or fully understood by many

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