As we know it, many people in most of our economies are not adequately protected against the variety of risks they face in their daily lives, including personal and asset related risks. Among the main risks the people face include the loss of a family member, an accident, crop or animal loss, a critical health incident, devastating consequences from natural disasters and weather events. And so, people lack effective risk management strategies that can help prevent shock or that can help mitigate the financial consequences of a shock.
Traditional risk mitigation strategies as we know them are often deficient. And in the absence of insurance, people resort to sub-optimal risk coping strategies, including selling productive assets, reducing, or stopping business investments and household spending on food or schooling, depleting savings, or taking out additional loans with often high interest.
These strategies are often more costly, generally only cover part of the loss and tend to contribute to intergenerational transmission of poverty. However, insurance, if more inclusive and fully appreciated, can reduce the dependence on these deficient strategies.
As it were, risks materialize in various forms, causing damage to the lives and health of individuals, to households or business assets, or to public infrastructure. The timing as well as the severity of the shock is uncertain. Insurance thus, provides a mechanism to help mitigate personal and enterprise-related risks and, thus, contributes to improved livelihoods and sustained development.
If fully appreciated, insurance could fulfil the following for people, enterprises and financial systems and governments.
From a livelihood perspective, insurance supports resilience: Insurance mitigates the financial losses the policyholders, family members or businesses suffer after a risk event. It helps to recover faster once a shock has occurred. By receiving an insurance pay-out, people and businesses are not forced to rely on coping strategies such as depleting savings, selling assets, or abstaining from spending for health, food, education, or business operations. Insurance offers an alternative to these strategies, which often have other negative repercussions on the households or businesses.
Policyholders and insured experience “peace of mind” since they know they are prepared for the case of a risk event. Moreover, insurance companies price the risk according to occurrence and severity, thereby elevating people’s thinking to better assess their individual risk profile and induce taking preventive measures such as placing the stove outside the house, having fire extinguishers, or using drought-resistant seeds.
From a developmental perspective, insurance sustains development efforts: Insurance sustains development efforts in case of a crisis which the person, the enterprise, the community, or the government faces. Without insurance, one single crisis such as a death, illness or accident in the family, or a disaster such as a fire, flood or drought can lead to severe financial consequences and eliminate the gains of many years. In these circumstances, the achievements of the individual as well as the community can be ruined. Ideally, insurance enables people and enterprises to consolidate the development efforts of their families and businesses, and helps them, as well as communities and governments, to mitigate the financial consequences of a shock or disaster.
Climate change favours natural disasters, which threaten society and companies. The insurance industry, as well as providing cover for these risks and their financial consequences, also contribute to sustainable finance.
As it relates to sustainability and sustainable finance – i.e., environmental, social and governance (ESG) – let us contextualize ESG factors as they relate to sustainable development and where the insurance stands.
For the Environmental: Climate change and the resulting weather-related catastrophes are among the biggest risks for the insurance industry. The good news is that reports show that payments for weather-related losses globally have quadrupled over the last four decades. It is understood that climate catastrophe is now the third biggest risk for non-life insurance and the second biggest risk for reinsurance.
As for S, Social: The ageing global population means the cost of healthcare within national budgets is continuing to grow. Governments are passing on a share of that cost to the insurance industry. In addition, the demand on social security (occupational disability, unemployment) is also growing. Moreover, new technologies are facilitating access to and distribution of insurance products.
In G for Governance: more and more insurers are taking long-term sustainability trends and factors into account in their risk assessments and claims management. This identifies and prioritises the most important sustainability topics with consequences for society.
As one of society’s key risk bearers, the insurance industry should maintain continuous dialogue with its stakeholders. In this way it improves its understanding of the key risks and ESG issues and can prioritise. On this basis, the industry can design new solutions and adapt processes to promote sustainable development.
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