Creating A Sustainable Environment For America’s Infrastructure

Sustainability is about improving quality of life without degrading the quality, quantity or availability of natural, economic and social resources. This definition stresses a triple bottom-line commitment to people/planet/profits that combines respect for the planet with equitable distribution.

Sustainability will create business opportunities and risks, and must be an issue of concern for risk managers and insurance professionals. While most insurance professionals and risk managers are aware of sustainability, as an industry, we are just scratching the surface to understand the connection between sustainability, risk and underwriting exposures.

The environmental, economic and social elements of sustainability will have impacts at a local, regional and global level for both risk managers and insurance-industry professionals. 

FROM LOCAL TO GLOBAL: HISTORICAL PERSPECTIVE

During much of the last century of industrialization, risks were primarily focused at the local level, such as protecting the physical value of a building or structure or liability arising from industrial operations and other fortuitous accidents.

Out of the 1970s and 80s, many environmental regulations were instituted in the United States with the passage of the Clean Water and Air Acts, forcing organizations to consider the regional impacts of their operations and holding polluters accountable for their actions. This concept of "polluter pays" has been adopted throughout Europe and within many other parts of the developing world and reflects an increasing commitment to eliminate or reduce further natural-resource damage to the Earth.

An article in the Nov. 27, 2010 issue of The Economist titled "Facing the Consequences notes that "some forms of adaptation—flood barriers, for instance— are clearly public goods, best supplied through collective action."

"Adaptation will require redistribution, too. Some people and communities are too poor to adapt on their own; and if emissions caused by consumption of the rich impose adaptation costs on the poor, justice demands recompense," the article says.

There have already been lawsuits against corporations seeking compensation to deal with the cost of adaptation, and this is likely to increase in the future. The costs of defending and possibly settling these lawsuits could be substantial, impacting both corporate balance sheets and stock value—and are already a topic of discussion in boardrooms across the world. Almost all forms of insurance may be exposed ranging from property, liability, and directors and officers coverage. As such, risk-management professionals must begin preparing for the impacts now.

Insurance a Small Part of the Solution

Many risk-management professionals believe extensive environmental underwriting experience is critical in dealing with this challenge; however, given my 20 years' experience underwriting environmental insurance, I feel some may be putting too much faith in the insurance industry's ability to understand this problem and create solutions allowing corporations to transfer their risk.

There is no doubt the environmental-insurance industry has been critical to organizations in dealing with environmental impacts from their operations and that available capacity has grown substantially over the past decade. However, the current insurance capacity available only offers a small percentage of funding for the potential costs that governments and corporations may face. Many other forms of risk management will need to be employed to establish a framework for the measurement and management of risk arising from activities that deal with our current and future sustainability challenges.

EnvISIon is just one of many initiatives currently underway by a variety of professional organizations and academic institutions that are studying and measuring sustainability. Through the creation of guidelines and performance benchmarks for sustainable design, construction, maintenance and remediation practices, these new tools will allow risk managers, corporate executives and directors to make better decisions.

Solutions Will Require Collaboration

The insurance industry must become an active participant in the sustainability discussion since there are substantial premium and loss implications.

Through the creation of new technologies and changing business practices, underwriters will be faced with new exposures requiring new products and underwriting approaches creating new revenue opportunities for the industry. 

However, the claims exposure to the insurance industry arising from the past operational activities and the increasing number of natural catastrophes could substantially increase industry loss ratios, leading to a reduction of available capacity and rising prices.

All liability and property insurance product lines have an interest in the success or failure of sustainability, and by working collaboratively with all stakeholders we can ensure that future investments in infrastructure are made in a manner that not only does things right (and safe)—but also is doing the right things for future generations.