How Insurance Companies Can Become Good Corporate Citizens

Hannah Rose


July 1, 2013


It is becoming increasingly important for companies to be good corporate citizens. Society has started to demand it. Consumers believe that increasing the transparency of business practices, and demonstrating positive social and environmental impacts are the two most effective actions companies can take to improve public trust in the private sector, according to the “State of Sustainable Business Poll 2011,” a survey conducted by sustainability consultant firms BSR and Globescan.

Despite the apparent recognition of its benefits, corporate social responsibility (CSR) is still only an emerging phenomenon in the Australian market. Companies remain skeptical of the idea and its purported benefits. The resistance may be, in part, because of Australia’s operation as a welfare state, where the onus is on government to provide basic social needs. It may also be due, in part, to the economic uncertainty following the financial crisis.

Corporations are justifiably uneasy about spending to implement socially responsible mechanisms when the benefits are not always quantifiable and may only be apparent in the long term. However, in light of the litany of corporate scandals in recent decades, it is difficult to maintain the view that organizations are under no obligation to consider the broader social, environmental and economic interests of all stakeholders.

Reputational damage is but one consequence if a company fails to appreciate the importance of its stakeholders’ interests. Take, for instance, the infamous Australian example of James Hardie Industries, which continued to manufacture and sell asbestos products even after becoming aware of the dangers. KPMG has estimated the total compensation costs at 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 Great Britain caused thousands of policyholders who invested in annuities to lose billions. And in Australia, there was the collapse of HIH Insurance, a failure caused by underpricing, reserve problems, false reports, reckless management, incompetence, fraud and greed. By the end of June 2003, the government-funded HIH Claims Support Scheme had paid out close to AU$245 million in claims.

Cases like these have 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 relatively unscathed compared to the banking sector, some leading insurers, such as AIG, Fortis (a Belgian insurance group) and Argenta (a Lloyd’s of London syndicate), were let down by their non-insurance operations. Despite the performance of the industry on the whole, trust in insurers deteriorated.

The increased occurrence of natural disasters has also presented a social challenge for insurers. Australia is highly exposed to natural disasters, and following the Queensland floods in 2010 and 2011, public leaders asked insurers to extend their compassion to victims. But with numerous insurers not offering flood coverage, many policyholders were forced to turn to the government for assistance when their policies did not respond.

During a crisis, an insurer needs to demonstrate that it is more than just a profit-generating, abstract entity. It is important for insurers to emphasize the vital role they play in economic and societal development. CSR measures implemented in good times—and in bad—will improve the industry’s reputation and reinforce stakeholder relationships. These two outcomes, in turn, can increase loyalty, sales and resilience.
Steps to Achieving Corporate Social Responsibility

When formulating CSR best practices, insurers should consider customers, employees, shareholders, intermediaries, suppliers, regulators and the broader community. The interests of these stakeholders are vast, and insurers should focus on those that are affected 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 rates. CSR can also increase long-term sustainability and profitability by shaping the market’s competitive environment and the community as a whole. Ultimately, it will result in insurers becoming more attractive to investors, who are increasingly concerned about CSR and corporate governance.
1. 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 insurer will go out of business, which will have wide-ranging effects on all stakeholders (as demonstrated by the HIH collapse). 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 real 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 claims efficiently, insurers must also keep down costs. Premiums are calculated by account for both the particular risks and operating costs required to provide the policy. It is therefore important to minimize overhead, infrastructure and claims-processing costs so that insurers can offer affordable insurance. There is, however, a fine line between insurers being adequately resourced and providing appropriately 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 practice. Insurers are in the business of risk analysis. They are the ones best 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 minimization may be more difficult to employ. Insurers should, however, attempt to do so in any circumstances over which they have some control. Appropriate strategic CSR measures used to reduce risk externally will depend on the type of products offered 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 entail 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 or requirements around insurance for projects that may impact human rights. One example is insurance policies for pipeline projects in countries where the exploitation of natural resources has fueled corruption, social unrest, conflict and abuses.

External risk minimization should reduce claims costs and frequency for clients, and insureds will thus be incentivized to reduce the likelihood and severity of loss in order to lower their premiums. Insurers should, and often do, consider offering discounted premiums to insureds that take preventative measures. For example, 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 part of risk minimization involves the environment, as insurers have an inherent interest in ensuring their 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 than 200 companies in the financial services sector to “identify, define and promote good and best environmental practice” in the industry. While some criticize 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 CSR and stay in reach of their most advanced competitors.

With climate change already impacting the industry—increasing the number of natural disasters, altering claims trends, 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 environmental 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 credits, but 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 slow deforestation that replaces open fires with energy-efficient stoves.

Some insurers are also helping customers reduce their energy consumption. For example, if customers’ homes are 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. They also have a policy 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 employee 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 fundraising efforts.

Another form of philanthropy relevant for insurers is disaster relief. Following the recent Queensland floods, for example, Suncorp donated AU$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 are a form of 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, an area known for its high number of insurance claims relating to theft. Independent analysis demonstrated that the program reduced crime rates amongst participants, and 65% of participants had not reoffended in the 12 months following completion of the program.

IAG 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 policies. Such mechanisms are often overlooked by companies that either do not see their importance—because they consider the protections afforded in the countries in which they operate to be sufficient—or specifically want to take advantage of the lack of protections provided by these countries.

Companies that show enthusiasm for observing voluntary human rights codes of conduct usually operate in a business with the potential to considerably impact human rights; the majority of their work may be done in developing countries, for example. These companies also tend to have high-profile brand names that they wish to protect, and for that reason they can be more easily pressured into action by civil society.

The insurance industry doesn’t meet this classification, but human rights are still an important consideration because insurance permeates many facets of everyday life. It is particularly relevant for corporations operating globally or those that may be considering outsourcing (or moving) services to countries with lesser human rights protections.

Many organizations have created initiatives to encourage companies to respect human rights and hold corporations liable for violations. One of the most notable is the “U.N. Guiding Principles on Business and Human Rights,” developed by Harvard professor John Ruggie and endorsed by the United Nations in June 2011.

These principles provide a useful reference for insurers. Ruggie explains that “to respect rights essentially means not to infringe on the rights of others—put simply, to do no harm.” The key operational element is to conduct due diligence to “become aware of, prevent and address adverse human rights impacts.” This process involves making policy commitments to human rights, undertaking “periodic assessments on the actual and potential impact of business operations on human rights, integrating the process into decision making and the tracking of performance.” The principles also recommend that corporations develop a means to hold themselves accountable and to provide for remediation through grievance or other mechanisms.

The concern about the lack of international legal remedies available for corporations’ human rights abuses is on the rise. Following the U.S. Supreme Court’s recent, controversial decision in Kiobel v. Royal Dutch Petroleum—a ruling that has rendered the Alien Tort Statute incapable of providing a means for justice for foreign victims—such concerns will presumably now be at the forefront of human rights discourse. Engaging in voluntary measures that afford some protection from human rights abuses now will help to diminish the demand for increased regulation in this area in the future.
6. Socially Responsible Investment

Socially responsible investment describes the process of including non-financial criteria—environmental, social and governance considerations—in decision making. Institutional investors, such as insurers, are in a powerful position in that they are able to encourage positive change in investment strategies.

Traditionally, institutional investors have affected the market by investigating how investment firm boards manage risk, analyzing reporting methods and occasionally recommending corporate governance changes. With issues such as global warming, child labor and other human rights violations becoming more prominent in investors’ minds, however, innovative companies understand that corporations that knowingly ignore social and environmental influences do so at their own risk. They may face complaints, litigation, tarnished reputations—or see their opportunity to operate in important markets diminished.

A positive correlation between social, environmental and ethical issues, and long-term shareholder value is a prerequisite for socially responsible investment to thrive. Studies have shown that it does not compromise financial gains. Indeed, some studies show a positive relationship between CSR and financial performance. Institutional investors, including some insurers, are recognizing that non-financial factors are appropriate considerations when it comes to investing.

There are three main strategies that socially responsible investors can use. The first, called screening, involves selecting investment options based on social or environmental criteria. It makes sense for insurers to screen out companies that, by the very nature of their operations, increase the likelihood and costs of claims, such as tobacco companies. The second strategy, shareholder activism, as its name suggests, involves communication with the investment company through shareholder resolutions, for example. If measures of communication are unsuccessful, then investors can always make their position clear by ceasing to invest in that company. The third strategy, community investing, is self-explanatory.

For example, Aviva has insured 450,000 underprivileged people in India who would otherwise not be able to take part in productive activities. Obviously, financial returns for this type of investing are likely to be relatively low; however, taking part in community investing may create new opportunities for an insurer while also improving its standing as a socially responsible corporation.
Hannah Rose is admitted as a lawyer in New South Wales in Australia. She primarily acts on behalf of insurers and insureds in litigated matters.