HOW INSURANCE COMPANIES CAN BECOME GOOD CORPORATE CITIZENS [Risk Management]

Companies in Australia have been slow to adopt corporate social responsibility, but insurers Down Under-and across the globe-will benefit if they become more accountable to the social and environmental interests of all stakeholders.

IT is becoming increasingly important for companies to be good corporate atizens. Society has started to demand it, Consumers believe that increasing the transparency of business practices, and demonstrating positive social and environmental tmpacrs arc the two most effective actions companies con take tii improve public trun in. the private sector, according to the ".StJtc of Sustainable Business iltd] 201 ]," a survey conduct«] by smtainability consultant films BSR and Globescan.. Despite the apparent

recognition of its benefits, corporasocial responsibility (OR) is Mill only an emerging phenomenon in the Australian market. Companies remain skeptical oJ the idea and its purposed benefits. The resistance may be. in part, because of Australia's operation as a welfare state. where the onus is on government to provide bask social needs. It may aku be due,, in pan, to the economic uncertainly following the financial crisis. Corporations are justifiably uneasy

about spending to implement socially responsible mechanisms. when the benefits are not always quantifiable 2nd may only be apparent in the long terra. However, in light of the lila ?? of corporate scandals, in recent décades, it is difficult to maintain the view that orgui'uaiiwn are under no obligation to consider the broader social, environmental and economic interests of all stakeholden.

Rcputational damage is but one consequence if a company fails to appreciate the importance of its Makdjoldets' interests. Take, for instan«, the infamous Australian example of James Haxdic Industries, which continued to manufacture and sell asbestos products even alter becoming aware of the daggers, KPMG has estimated the total compensation costs ar more than AU$3 billion, on top of the immeasurable social costs borne by the community.

The insurance industry has also seen its reputation tarnished by scandal. AIG was accused of bid rigging, accepting contingent commissions and reporting misleading financial figures. The Equitable Life scandal In Gnat Britain caused thousands of policyholders who invested in annuities to lose billions. And in Australia, there was the colbpse of HIH Insurance, a failure caused by underpridng, reserve problems, false reports, reckless management, incompetence, fraud and greed. By the end of June 2003, the govern rnejir-fundcd HIH Claims Support Scheme had paid out close to AU$245 million in daims.

Cases like these hase left the impression that unethical behavior is characteristic of the industry. Unfavorable media coverage has shaken stakeholder confidence and raised suspicion.

The insurance industry's reputation suffered a setback from the global financial crisis. Although most insurers were rdarively unscathed compared ro the banking sector, some leading insurers, such as AIG, Forcis (a Belgian insurance group) and Argenta (a Lloyd s of London syndicate), were let down by their noninsurancc operations. Despite the performance of the industry on the whole, trust in insurers deteriorated.

The increased occurrence of natura! disasters has also presented a social challenge for insurers. Australia is highly exposed ro natural disasters, and following the Queensland floods in 2010 and 2011, public leaders asked insurers to extend their compassion to victims. But with numerous tarnten not offering flood coverage, many policyholders were forced to ram to rhc government for assistance when cheir policies did nor respond.

During a crisis, an insurer needs to demonstrate that íc is mote than jttsr a profit-generating, abstract entity. It is important for insurers ?? emphasize the vied role they play in economic and societal development, CSR measures implemented In good times-and in had-will improve the industry's reputation and reinfoice stakeholder relationships, These two outcomes, in rum. can increase loyalty, sales and resilience,

Steps to Achieving Corporate Social Responsibility

When formulating CSR best practices, insurers should consider customers, employees, shareholders, intermediaries, suppliera, regulators and the broader community, The interests of these stakeholders are vast, and insurers should focus on those that arc affcctcd by. or align with, their business operations,

There are many potential benefits, Insurers can earn a superior reputation in the market. They can Increase engagement and loyalty among staff while reducing turnover rares. CSR can also increase long-term sustainability and profitability by shaping the markets competitive environment and the community as a whole. Ultimately, it wilt result in insurers becoming more attractive to investors, who arc increasingly concerned about CSR and corporate governance.

l· Paying Valid Claims Efficiently

Paying valid claims efficiently sounds simple, but it involves more than the obvious. Having the right technology is essential, as is staff training Insurers also need to price risks accurately and fairly. If risks are continually underpriced, an iruurci will go out of business, which will have wide-ranging effects on all stakeholders (as demonstrated by the HIH cotlapsc). On the other hand, if risks are overpriced, customers may not be able to afford adequate coverage-and may choose not to insure at all, If most businesses and individuals choose to bear the risk of a loss that they cannot afford to cover, this will have teal implications for the economy, as well as individuals' health and safety. It would also place an unbearable burden on the government to serve as a safety net.

To pay valid daims dfidendy, insurers must also keep down costs. Premiums are calculated by account for both the particular risk.·» and operating cwts required to provide the policy. It is therefore important to minimize overhead, infrastructure 2nd claims-processing, costs so char insurers can offer affordable insurance. There is, however, a fine line between insure» being adequately resourced and providing approptiatdy priced insurance and insurers being under resourced, leading to cheaper insurance-but poor service, long delays and higher claims costs.

2. Risk Minimization/Loss Control

Money can never entirely repair damage. Therefore, calculating the probability of loss and its likely costs is not. by itself, good pracrice. Insurers are in die business of risk analysis. They ire die ones beat positioned to minimize risks-both internally in their operations and externally for their clients and other stakeholders.

Internal risk minimization could be as simple as implementing proper policies and procedures, such as occupational health and safety guidelines. External risk minimisation may be more difficult to employ. Insurer* should, however, at tön pi to do so in any circumstances over which they have some control· Appropriate strategic CStt measures used to reduce risk externally will depend on the type of products ci Fe ml by an insurer. In general, Insurers should train underwriters to look more closely at clients' internal decision-making processes, risk management procedures and ethics.

Underwriting for large. risky projects or companies should email in-depth research on the likely sources of risk as well as more extensive screening and monitoring. Further, insurers should be proactive in stipulating limits of requiremens around insurance for projects that may imp« human rights. One example is insurance policies for pipeline projects in countries where the exploitation of natural resource has fueled corruption, social unrest, «inflict and abuses.

Fjttcrnal risk minimization should reduce daims costs and frequency for clients, and insureds will thus be Lncentivucd to reduce the likelihood and severity of loss in order to lower their premiums. Insurers should, it id often do, consider offering discounted premiums to insureds that cake preventative measures, lor «ample, discounts are offered to households that install security systems, young drivers who take safety courses and life insureds who do not smoke.

3. Climate Change Leadership

For insurers, a big parr of risk minimization involves the environment, as insurers have an inherent interest in ensuring rheif clients are equipped to deal with natural disasters and the effects of climate change. The United Nations Environmental Program Finance Initiative is a collaborative effort of more dun 200 companies in the financial services scctot to "identify, define and promote good and best environmental practice" in the industry. While some ctitici« its lack of enforcement powers. the initiative plays an important role in fostering international dialogue. Insurers should support the work of the program, and those like it, if they want to strengthen their position as pioneers of CS It and stay in reach of their most advanced competitors,

With climate change already impacting the industry-increasing the number of natural dLasters, altering claims (rendí, prompting a need for novel underwriting skills, escalating business costs, spurring new regulations and altering the investment environment- many insurers have focused their CSR strategies on reducing their environ' mental footprint.

In 2006. for example. Aviva, a European company, became the first insurer to "carbon neutralize" its operations, Its program focuses on reducing energy consumption, paper use and business travel while capitalizing on energy-efficient property management, waste management and carbon offsetting, The company's approach to carbon offsetting is particularly noteworthy. Not only has Aviva approached carbon brokers to buy carbon crédits, hut it has also introduced innovative social and commercial projects to offset carbon emissions. For example, the company is supporting a World Food Organization project in sub-Saharan Africa to stow deforestation that replaces open fues with energy-efficient stoves.

Some insurers arc also helping customers reduce their energy consumption. For «ample, if customers' homes arc 80% damaged by a weather-related event. Suncorp and GIO offer them up to AU$2,500 to pay for rainwater storage or solar power The)"· also haw a polrcy of providing replacement household products that have a minimum three-star energy-efficiency rating,

4. Strategic Philanthropy

Strategic philanthropy involves partnering with charities or organizations in the community for a mutually beneficial purpose. This type of corporate giving can not only impact the community but also other stakeholders in the business,

For instance, QBE has set up a foundation that aims to drive employ« engagement. Through the program, employees are able to apply for local grants for charities that they personally support. Employees can also get involved in the community through paid volunteer leave» and the foundation has promised to match employees' charitable contributions and fiindnusing efforts.

Another form of philanthropy relevant for insurers k disait«- relief. Following the recent Queensland Roods, for example. Suncorp donated ADS 100,000 to the Queensland premier's "disaster relief appeal" and set up customer response teams in remote locations to assist as many customers as it could. Further. Suncorp provided employees affected by the floods with a range of services including professional counseling, financial recovery packages and hardship grants.

There are many other projects insurers could support that a« a form oí strategic philanthropy. Those that decrease crime or improve safety are particularly valuable, as they not only support the participants but create safer communities, which have lower claims costs than dangerous areas.

Mission Australia initiated such a program to deter young people from South Pacific Island backgrounds from committing criminal behavior in Sydney's southwest, ah atea known for its high number of insurance claims relating to theft. Independent analysis demonstrated that the program icduccd crime rates amongst participants, and 65% of participants had not reoffended in the 12 months following completion of the program.

LAG has done something similar. The company focused its strategic philanthropy on a partnership with St. John Ambulance to help stakeholders improve their safety and reduce injuries,

5. Recognition for Human Rights

Studies show that few companies have taken steps to implement human rights pol ides. Such mechanisms ire often overlooked by companies chat either do not see (heir importance-because they coriiidci the protections afforded in the countries in which they operate w be sufficient-or specifically want (O take advantage of the lick of protections provided by these countries.

Companies that show enthusiasm for observing «jlutilaiy human rights codes of conduit usually operate in a business with the potential to considerably impact human rights; the majority of dieirwork may be done in developing countries, for example. Ihese companies alto tend to have high-profile brand nam« that they wish to prate«. and for that reason they can be man· easily pressured into anion by civil society.

The insurance industry doesn't meet this classification, but human rights are still an important consideration because insurance peimcares many facets of everyday life. Ir is particularly relevant foi corporations operating globally or those thai may be considering outsourcing tor moving) wrviccs to countries with lesser human rights protections.