AA Insurance's Georgia Mismash wins 2022 ICNZ Scholarship

Georgia Mismash, AA Insurance, won the 2022 ANZIIF and ICNZ Scholarship with her essay addressing the following questions:  How might climate change pose a reputation risk to insurers? How might that risk be managed? 

Introduction

Climate change is a fierce disruptor; a claimer of land, an administrator of the stormy and scorching days society wakes to, a now ever-present fixture in mainstream media.

However repetitious it feels to state, climate change will ultimately shape how business operates now and beyond. Insurance companies are certainly no exception, and their reputations are on the line.

This report provides context to the relationship between insurers and climate change. It explains how climate change poses a risk to the reputation of insurers and how that risk might be managed.

A unique relationship

The 2022 Edelman Trust Barometer found that globally, 75 per cent of people worry about climate change, a statement reflective of shifting public sentiment. Climate change should also be a top-of-mind concern for insurers (Fleming, 2021).

Reports of the physical insurance risks arising from warming weather began as early as the 1970s (Prudential Regulation Authority, 2015). Last year, the United Nations reported an alarming five-fold increase in weather-related disasters over the past 50 years (United Nations, 2021).

Life and health insurers also face the human health consequences of climate change. The World Health Organisation predicts climate change will cause an additional 250,000 deaths per year between 2030 and 2050, warning too of increased illness and injury (Climate Change and Health, 2021).

The industry will unequivocally continue to research these climate risks, as they correlate to tangible bottom lines (Collier et al., 2021).

For example, increasing costs are clearly tied to weather events like flooding, which spike claims for things like homes and vehicles.

Tim Grafton, Chief Executive, Insurance Council New Zealand, speaks to the issue saying, “The rising cost of climate change is plain for all to see, both within Aotearoa and overseas.” (ICNZ, 2022).

As increased weather events and long-term health implications are realised, the wider industry is primed to face an increase in the volume of claims. This shift may alter the affordability and more importantly, the availability of insurance. It may also change the type of insurance products sold (Collier et al., 2021).

In simple terms, the insurance business model only works when the premiums of the “many” can cover the misfortunes of the “few”. This balancing act is threatened as climate change causes the few to become the many.

It is clear that decisions insurers make now have the power to inform future customer experiences and the very viability of their businesses.

The insurance industry is equipped with a true mastery of risk and a wealth of information, which makes its relationship with climate change more unique. This important expertise is also widely recognised.

Following the Paris Climate Agreement, insurers were bound to action at COP21 in 2015. Insurers were singled out as “crucial” to climate change risk management, signalling the need for industry support (Golnaraghi, 2016).

As a symbol of industry action, the Geneva Association formed a climate change task force in 2020, including 18 of the largest insurance companies (Golnaraghi, 2021).

As governments amp up their responses, it is expected that regulation will cause sustainability to become more central to insurance’s business practices (Hirsch, 2021). It is safe to then predict that the consumer paradigm will shift from businesses standing out for green behaviour, to green behaviour becoming an expectation for standing at all.

With all of this in mind, there is a less obvious risk climate change poses to insurers — the risk of reputational damage.

Reputation matters

Reputation is critical to the success of insurers, and it is all about perception. An insurer’s reputation is established by the thoughts of a range of stakeholders and is considered to be robust if positive thoughts are held by multiple stakeholder groups (Eccles et al., 2007).

Reputation can be shaped by many factors, such as customer service or performance. Unsurprisingly, a business’s approach to climate change is capable of bending perceptions and consumer behaviour.

Deloitte called 2021 “the Age of Activism”, noting that 42 per cent of consumers actively changed their consumption habits due to environmental beliefs (Deloitte, 2021).

The perceptions consumers have of any company impacts how it operates, including the prices it can charge and the level of talent the business can attract and retain. Reputation is valuable social capital that correlates to financial performance.

In addition, companies with a positive reputation bounce back more quickly from instances of reputational harm (Eccles et al., 2007).

A good reputation fosters more forgiveness in times of reputational damage, offering true resilience. That's something of particular importance to an industry  expected to help relieve disaster and loss.

Because reputations are dependent on personal assessments formed collectively by stakeholders, they cannot be formulated or forced.

This is not to say that a company's reputation cannot be tamed. Reputations are influenced by many factors within the locus of insurers’ control, namely: trust, responsibility, leadership/success and fairness (Kantar, 2022).

The insurance promise

It can be argued that reputation is of even more importance to the insurance industry which predominately sells the promise of care and support following a loss.

According to Greyser (1999), corporate reputations matter most when consumers are least able to assess a product’s performance.

Insurance requires a higher level of consideration prior to purchase, as consumers can’t give it a "test drive" or trial as they might with other products. With new terminology for customers to learn and sums to agree on, there is an air of significance to purchasing insurance.

Uniquely, the insurance service experience is one that customers hope they will never have and in fact, some will go years without a claiming while others may never claim at all.

As a result, a provider's reputation can be paramount for consumers when they are deciding on a purchase.

Reputation has hold power in a consumer’s mind and while this stickiness may briefly protect an insurer that breaks its promises, consistently falling to live up to stated standards and values will eventually foster harm (Jeffrey et al., 2019).

This is yet another facet of risk insurers should consider as they respond to climate change.

Where damage comes from   

An insurer’s reputation will always be at risk. Damage can be inflicted from a range of sources, for example, negative customer service experiences or inflammatory celebrity statements captured on social media.

When looking at climate change and reputation research, the themes that arise indicate two common spaces where reputation may be harmed:

Reputation is commonly damaged where a reality-reputation gap exists or in a sphere of changing expectations and beliefs (Eccles et al., 2007).

While providing coverage may often fall to government or reinsurers, private insurance companies are the face of the industry. This positioning exposes them to greater reputational risk.

The reputation-reality gap

A business’s reputation can be different from its reality. When reputation is questioned in the context of climate change, the gap between reputation and reality results in several potential risks. Some examples of these risks include greenwashing and negative association, which help shine a light on this important area of concern.

Greenwashing, where a company aligns with a sustainable identity it truly cannot manage, is a poignant example of a reputation-reality gap.

False statements, overpromising, excluded information, empty reporting and other tactics of obfuscation are ripe to be exposed, if not by motivated consumers or teenaged protesters, by bots trained to sift company information for instances of greenwashing. (Tett, 2021).

The Australian government is currently managing the risk of losing consumer and social trust by actively penalising companies who are greenwashing (Hannam, 2022).

Another example of a risky reputation-reality gap is the risk of association with unsustainable others.

Even if an insurer is taking all the steps necessary to live up to its own stated green values, there is still a risk of being associated with unsustainable third parties.

Most commonly, this risk by association arises when a business’s practices are scrutinised and found to be inconsistent due to the actions or reputations of those with whom they choose to work.

As a result of globalisation, an insurer’s reputation may be measured by all its partners, including, for example, service providers contracted to rebuild or replace assets following a loss.

Insurers’ investments will likely be viewed from this perspective too, with some regulators incentivising or enacting policies to decarbonise investments (Grimaldi et al., 2020).

Insurers should also “mind the gap” of inconsistency when offering cover to individuals or businesses that act unsustainably.

Changes in beliefs and expectations

Even with a minimal reputation-reality gap, insurers will find they are still at risk if expectations change around them.

This notion is more concerning given the accepted deadline for accomplishing a low or no carbon economy is rapidly approaching, which may result in a significant fluctuation of consumer and regulatory expectations and beliefs.

Regulation and subsequently, the ability to meet goals, will be critical competencies for insurers to consider. Meanwhile, as government expectations move to align with ambitious climate goals, insurers who do not comply will be at risk of public scrutiny in addition to legal repercussions.

New Zealand has recently mandated climate-related disclosures, and its insurance sector is required to begin publishing these in 2024 (Ministry for the Environment, 2022).

This change in expectations is an example of where exposure to reputational risk may emerge for those who fail to comply and for those who do not have flattering or justifiable information to share.

A company’s reputation is often decided by its ability to consistently deliver on its promises and goals.

The ability to effectively manage goals within a changing environment can be viewed as a sign of quality within an industry (Hammond & Slocum, 1996). Such expectations of quality take on a new meaning when applied to the insurance industry in times of climate change.

Customers expect their insurer to provide coverage and protect them in times of loss. If insurers’ actions are perceived to cause specific regions or lines to become uninsurable or unaffordable, this may be viewed as a sign of the industry’s inability to deliver on its goals.

A reputational cost is likely to ensue. If insurers’ services are impacted by increasing claims, changes to coverage or changes to premium prices, their reputation will again be at stake as customers question their insurer’s ability to meet expectations.

Inaction or maladaptation can reveal a gap in beliefs and expectations. If an insurer acts as though climate change is not urgent, it could be perceived as irresponsible.

While it may not be popularly known that claims and affordability are tied to climate change, customers will nevertheless expect trusted insurers to act thoughtfully to protect them. Inaction may be viewed as a direct contradiction to an insurer’s purpose.

How to manage reputation

There is no doubt that it’s a challenge to manage a collective perspective, but with an understanding of reputation, this can be tended to successfully.

Just some examples include making use of considered marketing campaigns, the work of front-line employees, or the glow of a positive media story. However, looking after a business’s brand and above that, its reputation, is a bigger task when considering climate change.

Insurers should anticipate reputational risk by monitoring it and not only acting in response to potential exposure, but also to proactively to strengthen their own reputation and that of the industry at large.

Know where you stand

You cannot manage well what you do not know. Insurers should incorporate reputational risk into their assessment repertoire, especially considering the impact on their reputation of each climate decision or lack thereof.

While there is not a universal tool for assessing reputational risk, there are many helpful options insurers can make use of to get a grasp on how stakeholders perceive their company.

Each risk should be carefully assessed and acted upon accordingly. Rather than mopping up when reputational damage strikes, insurers should manage risk by tracking their operating environment and acting proactively.

While this sounds like a given, the disruptive nature of climate change means the insurance environment is always evolving. Being aware and protective of an organisation's reputation is important.

Once understood, the process of considering reputational risk becomes strategic and advisable to actively strengthen a company’s position in the market.

Take a stand

Failing to respond responsibly and proactively to a changing climate is a failure to act in the best interest of insurance customers who may ultimately be affected by the consequences of global warming.

It is time for insurers to take a stand. Traditionally, insurers have been there to support customers following loss. In modern times, insurers should help customers avoid or reduce loss before it happens.

Responsibility is a key aspect of creating a positive reputation for insurers and the industry. Further, this is the approach most consumers are expecting. Consumers want business to help usher in sustainable practices, as an intermediary to government or media (Edelman, 2022).

For the sake of taking responsibility and protecting their reputation, insurers can actively champion sustainability. This can be done in many ways.

The Geneva Association lists several ideas including “understanding the climate change problem, promoting loss prevention, adapting terms and conditions in line with risk-reducing behaviour, crafting innovative insurance products, offering carbon risk-management and offsets, financing customer improvements, investing in climate change solutions, building awareness and participating in public policy”. In addition, insurers can lead by example to disclose carbon risks. (Herweijer et al., 2009).

Building trust

Trust, a building block of a good reputation, is another key element of particular relevance for insurers and the insurance industry. To that end, studies have found that sharing quality, transparent information is the quickest way to increase trust in a business (Edelman, 2022).

Insurers have an opportunity to proactively share data to help safeguard them from accusations of greenwashing or litigation, while potentially motivating further climate change action in society. 

Across 20 markets surveyed by Kantar (2022), 66 per cent of people revealed the belief that it is important for brands to have a commitment to making society better. Corporate social responsibility is known to increase loyalty and purchases (Aguinis & Glavas, 2012), so striving for climate change leadership is sure to bring additional benefits.

Insurers are well-placed to have an influence in this regard. Strong leadership is another important path for building a positive reputation, and insurers could explore how their own practices could provide an example to others.

Although the leadership approach is not as impactful as achieving trust and taking responsibility, it is important, as it sets a standard for insurance players to reflect and support climate action further both within the industry and beyond. 

As leaders in understanding risk, insurers can actively educate and help plan for a greener future, involving employees, developers, government and consumers.

The New Zealand government recently released its climate change national adaption plan to respond to the effects of climate change (Cardwell, 2022). This is an opportunity for insurance companies to influence how communities adapt.

With the first part of the plan focused on data collection, insurers have a chance to inform decisions around adaption actions to avoid, protect, accommodate or retreat. By using industry expertise, insurers can not only influence adaption measures but can advocate for equity within underprivileged communities.

Given consumers will need considerable support beyond education, insurers can lead a shift in social expectations that could drive net-zero behaviour.

Insurers should strive to make climate friendly behaviour the easy and most obvious option for consumers (Thøgersen, 2021). Insurers can take inspiration from the banking industry, which is innovating with products like “green loans” (ANZ Business Green Loan, 2022) that incentivise sustainable decisions.

Conclusion

Climate change poses far more than a reputational risk to the insurance industry, it threatens the very foundation of its operations. Climate change also presents the insurance industry with opportunity.

This essay set out to identify the reputation risk climate change brings and to suggest ways to manage that risk. It encourages readers to consider what lies beyond the reputational risks of climate-related, altered perceptions and shifting sustainability requirements.

How can the insurance industry actively fight climate change with the entirely apt intention of doing good? How can insurers strengthen business and reputation along the way?

Consumer behaviour is made pliable by social influences, as the attitudes and actions of others form collective expectations for a certain behaviour to be upheld (Habib et al., 2021). Insurers can change expectations with expert knowledge, valuable data and their guiding purpose of helping people.

Insurers have the chance to work with governments, other businesses and media, urging change rather than waiting for it. They can educate and support consumers as we move towards safety and greener decisions.

Larry Fink, Chief Executive Officer of the global investment firm BlackRock, summarises the pivot from risk to opportunity well: “We know climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.” (Fink, 2021)

Where climate change is unpredictable and aggressive insurers can provide stability by taking the actions that an increasing number of consumers seek, and society needs.

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