The Way Business Is Moving published by
Issue Date: July 2008

AnalystWatch: Insurers' IT not 'green' but that is OK

July 2008

The insurance industry, perhaps more than any other sector, is focused on understanding and mitigating global warming, and for good reason: a changing environment could amplify risks, resulting in lower underwriting profits.

Yet despite their heightened interest in climate change, few insurers are wholly committed to building a green IT environment. According to a recent Datamonitor survey of 200 global insurers, most weigh cost and performance above environmental consequences when making IT decisions,
The operational success of property and casualty insurers, also known as non-life or general insurers, is correlated to the weather. A warming earth that causes more frequent and fierce tropical storms, as predicted by the International Panel on Climate Change, could lead to mega-catastrophes that dwarf Hurricane Andrew, which hit Florida in 1992 and caused $15,5bn in insured losses, and Hurricane Katrina, the 2005 storm that caused $40,6bn of losses. Furthermore, warmer, drier inland regions could experience elevated fire risks.
Foreseeing these risks, insurers have pushed through premium increases in catastrophe-prone regions, while others have simply stopped writing policies in these markets.
However, both of these approaches are insufficient. Regulators have tempered rate increases, and while exiting the market may protect against future losses, it diminishes an insurer's ability to cross-sell other, safer products.
Life insurers are not immune to the effects of climate change. According to World Health Organization predictions, global warming could enable insect-borne diseases, such as malaria, to spread into northern geographies. Furthermore, droughts that lead to famines could slow or reverse global economic growth, inevitably leading to poor investment income for all types of insurers.
The plethora of climate change scenarios currently cited by environmental agencies, most of which heighten risk exposure, have led many insurers to develop innovative products in an attempt to reduce greenhouse gas emissions.
A number of insurers have developed products that promote eco-friendly behaviours; for example, Travellers offers a 10% discount to hybrid vehicle owners.
Other insurers have created divisions to underwrite alternative energy projects. This serves two important purposes. First, underwriting novel risks provide insurers with new pockets of growth. Second, and perhaps more importantly, by assuming the risk of alternative energy projects such as wind or solar farms, insurers are increasing the success rate of the burgeoning industry.
However, despite the insurance industry's ambition to reduce greenhouse gas emissions in order to mitigate climate change, few insurers have eco-centric approaches to information technology.
The Datamonitor survey of global insurers conducted in the first half of 2008 found that over one-quarter of life insurers and one-fifth of non-life insurers do not consider environmental impact when making IT decisions.
Conversely, only 13,3% and 7,5% of life and non-life insurers, respectively, chose the technology or strategy with the least environmental impact regardless of price or performance. The bulk of non-life insurers do indeed consider environmental impact, but ultimately place more emphasis on price and performance.
On a regional basis, Asia Pacific insurers are progressive in developing a green IT strategy. Only 20% of Asia Pacific insurers do not consider the environment when making IT decisions, compared to 22% and 27% for Europe and North America, respectively. Furthermore, over 43% of Asia Pacific insurers weigh environmental impact equal to price and performance, a far greater number than in Europe (34%) and North America (27%).
The overall attitude of insurers could be defined as hypocritical. The insurance industry, after all, is trying to persuade others to minimise their greenhouse gas emissions, but many insurers are not investing in green operations of their own. However, this definition is unfair and inaccurate.
For instance, insurers are emphasising virtualisation as a way to reduce costs. According to the survey, virtualisation is the third most preferred cost-reduction strategy, behind systems rationalisation and process automation, but ahead of SOA, systems replacement, and outsourcing.
The unintended consequences of virtualisation, which increases hardware utilisation by enabling multiple applications to run on one server, are lower energy requirements. Virtualisation can also lead to smaller datacentres filled with less hardware, which has the environmental benefits of less land and materials use.
Additionally, an IT strategy that weighs performance above the environment can still have a significant net benefit.
By placing a greater emphasis on performance metrics such as product innovation, time-to-market, and sales effectiveness, insurers will be more effective in pushing products with green incentives and developing new underwriting practices focused on the green economy.
In a short time, the benefits from more hybrid vehicles on the road or the creation of more wind farms because of the availability of insurance should outweigh the detriments of a 'non-green' IT strategy.

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