Should Catastrophe be Profitable?

Why insurance innovation is a must for social impact

Insurance is a vital aspect of modern society that greases the wheels of economic production, spreads risks and protects both people and businesses from going bankrupt.  Transferring risk allows us to weather the blows of bad luck and moves resources from those not impacted (through their premiums) to those who are impacted (through claim payments).  Without insurance we probably wouldn’t have highways, home ownership or the internet. 

At its heart, insurance is a more complex version of neighbors putting money in a hat for a collective emergency fund - except now we pool capital with neighbors all over the world and insurance companies hold the hat. 

When the insurance industry’s incentives align with the common good, great things can happen.  Public safety standards are set for electric wiring and safety belts, allowing the spread of modern lighting and the family car, for example. 

But when the insurance industry loses sight of its role in society and the long term impact of its actions, wild fires burn hotter, glaciers melt and homes become unaffordable.

Take this quote, for example, published in Reinsurance News, from Hiscox’s Group CFO, Paul Cooper:

in light of recent catastrophe activity, rates are expected to remain robust, creating
“very attractive” conditions in the property cat market.

Let me decode that for you. The insurance industry can use the devastating impacts of Hurricane Helene as cover for raising rates to make more money in areas that may be exposed to catastrophic weather events.  In the short term, hurricanes like Helene are actually good for business.

I want to be clear that Mr. Cooper has done nothing wrong and he’s not alone; he’s just doing his job, which is measured by short-term returns. This is how the industry functions - when a vertical becomes more risky, it also becomes more profitable for those with the appetite.

The challenge for all of us is to build the business case and momentum for positive change. Underwriting communities that invest in resilience, quickening the transition to renewable energy and regenerative agriculture, and placing some high impact, long-term bets are also good for business.