Insurers' IT strategies are not 'green' - and that's okay

The operational success of property and casualty insurers (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 $15.5 billion in insured losses, and Hurricane Katrina, the 2005 storm that caused $40.6 billion of losses. Furthermore, warmer, drier inland regions could experience elevated fire risks.

Foreseeing these risks, insurers have enacted 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 Organisation predictions, global warming could enable insect-born 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.

Innovative products

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 personal lines 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. A Datamonitor survey of 200 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.

Leading the pack

On a regional basis, Asia Pacific insurers are progressive in developing a green IT strategy. Only 20% of insurers in this region 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%).

Overall, the insurance industry could be accused of hypocrisy. The industry, after all, is trying to persuade others to minimise their greenhouse gas emissions, while they are not investing in green operations of their own. Datamonitor believes, however, that such an accusation would be unfair and inaccurate.

Cost savings

For instance, insurers are emphasising systems rationalisation and virtualisation as ways to reduce costs. According to Datamonitor's survey, rationalisation and virtualisation are the first and third, respectively, most preferred cost reduction strategies, ahead of developing a service orientated architecture, systems replacement and outsourcing. These strategies enable cost savings through lower energy usage, which incidentally means fewer green house gas emissions, assuming the energy is derived from traditional sources such as coal and oil. Furthermore, virtualisation - which increases hardware utilisation by enabling multiple applications to run on one server - can lead to smaller data centres 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.

Notes

Datamonitor's report Business Trends: Global Insurance Technology Trends, 2008 (Customer Focus). This report is the result of Datamonitor's annual global survey of 200 IT decision-makers within insurance companies. Recent trends in insurance business operations, including claims, policy administration, distribution and outsourcing are covered. IT budgets, technology drivers and strategies are explored. Life, non-life and multi-line carriers are represented. Geographic scope covers Asia Pacific, Europe and North America.