James Hutchin, CPCU
Fox School of Business, Temple University
James Hutchin, CPCU (02.08.10)
James Hutchin is a Clinical Professor at the Fox School of Business at Temple University, where he teaches in both the General and Strategic Management and Risk and Insurance departments. His primary responsiblities are in an action-learning program for MBA students engaged in live client projects, the Enterprise Management Consulting Progam, where he is also leading the Initiative for Sustainability Strategies.
Mr Hutchin's diverse experience includes working in risk and strategic consulting with both global and small and entrepreneurial businesses, and he is also the president and founder of Alba Advisors LLC, a boutique consulting firm specializing in the financial services industry. Mr. Hutchin has over 25 years of management experience, including as a CEO, in the financial services industry, with "on the ground" working experience in Europe, Asia, Latin America, and the United States. He has published more than 25 articles in various journals, including The Geneva Papers, John Liner, National Underwriter, Risk Management, and International Insurance Section Quarterly..
Mr. Hutchin is a CPCU, and received his Masters in International Management from the American Graduate School of International Management. He has a Bachelor of Arts in Philosophy and Asian studies from Randolph-Macon College in Ashland, VA.
Let’s begin by having you explain what led up to the publication in October 2009 of the United Nations Environment Programme report, “The Global State of Sustainable Insurance – Understanding and integrating environmental, social and governance factors in insurance.”
The insurance industry has often been made painfully aware of the “linkage” between environmental, social and governance (ESG) factors and their own operating and financial performance. Issues that often start as a social concern of the few have a demonstrated pattern of evolving over the years into major financial impacts for the industry. Examples would include asbestosis, environmental liability, director’s and officer’s liability, etc. Even product liability, which we now think of as ubiquitous, was not really an area of significant litigation and/or insurance product development until the mid-20th century. And of course, the current “elephant in the room” is global climate change.
UNEP FI is a public/private partnership focused on issues related to the environment, and the broader subject of sustainability. The world’s leading insurance and reinsurance companies formed the Insurance Working Group in partnership with UNEP FI specifically to explore how to improve underwriting performance as respects ESG factors, which in the jargon of our industry, we might simply refer to as an important category of “emerging risks”. And, this is one of those rare opportunities where there is a natural alignment of interests between the performance goals of an industry and important support of useful public policy.
A critical first step was a survey of insurance industry participants around the world to determine the current “state of play” as respects the perceived importance and current integration of ESG factors in insurance company operations. This survey served as the primary “input” for our publication, and will act as the evidence-based foundation for the development of a set of Principles for Sustainable Underwriting.
How did the Fox School of Business at Temple University become the lead academic institution for the UNEP report?
First, let me say just how privileged we were to work with a number of the finest universities around the world. In many ways this is a question perhaps better posed to our friends at UNEP FI, so I will simply venture my best guess about what distinguished us at Fox.
We bring an unusually useful dimension to this sort of research in that we are a business school still possessed of a keen respect for the “practitioner”. Prior to joining Fox, I spent 30 years as an insurance company executive, in a number of positions around the world, and the knowledge of how things actually work enabled us to move quickly and efficiently. The subject matter expertise also meant that we could identify important “connections” that others might have missed.
Secondly, we have a unique action learning program embedded in our MBA curriculum, called the Enterprise Management Consulting program (EMC). Every MBA candidate must work on a live consulting project as a part of their learning experience, and this meant that we had a structure in place such that an undertaking of this scale could be handled on a “plug and play” basis. The work of the five zealous, overachieving, MBA students that worked on this project is what made it possible.
Finally, we had an internal learning curve advantage and solid institutional support. Our work for UNEP FI is one of more than 20 sustainability projects we have undertaken as a part of the EMC program. The school has a long standing commitment to sustainability, and interest in the insurance industry as well. In fact, we are the only major business school whose dean once served as chair of a risk and insurance department.
One of the report’s key findings says “effective ESG risk management and financing entail the systematic integration of material ESG factors into company-wide policy and core insurance processes.” What do the report’s sponsors have in mind with this statement?
Everyone that works in the industry is keenly aware of the fact that every underwriter operates with two sets of underwriting guidelines – the one promulgated by the company, once in massive manuals and now embedded in IT systems, and also the one they carry in their head. Underwriting involves the complex task of taking objective guidelines and then applying them subjectively to a specific risk. It is not at all unusual for the underwriting guide “in the head” to get ahead of the curve as respects the formal guidelines produced by a company. We were quite struck in the survey results by the extent to which underwriters perceived societal response to often be lagging their judgment of where a given ESG factor stood as respects its “evolution” towards being an area of real public concern and substantial potential financial impact.
So, in short, the observation is simply that as an important category of emerging risks, ESG factors need thoughtful and continuously refined integration in core insurance company processes. And, that integration should not necessarily be held up while a societal response is put in place – the Climate Wise Principles on dealing with the insurance risks arising from global climate change would be a good example. Further, it needs to be “systematic”, and reflect the practical realities of running a business and dealing with the myriad of risks the industry is dealing with. An example might help.
The number of potential risks spawned by ESG factors is beyond counting. It would be of little utility, and no practical purpose to issue a blanket instruction to underwriters to “take ESG factors into account when underwriting a risk…..” Much more productive, in terms of both financial performance and the “public good”, is to think through it systematically on a by line of insurance basis. So, marine P&I underwriters are urged to ask potential insured’s about the control of transmission of invasive species in the ballast water of ships. Health and Life carriers focus their management of ESG factors on financial inclusion and accessibility to their products for a larger percentage of the population, including the poor.
More examples abound, but the point is that in the absence of specific application to a specific line of business, and the subsequent underwriting of individual risks, ESG factors run the risk of being simply another corporate “feel good” exercise – and our industry has more flesh in the game than others. When ESG factors go wrong, insurance is often the mechanism for settling the economic consequences. The proper risk management of ESG factors, a reputational risk issue for many industries, should be for those of us in the insurance industry a core operational concern.
Another report recommendation calls for the insurance industry to develop and adopt “Principles of Sustainable Insurance.” Can you explain this recommendation in more detail?
We operate in a unique industry – in some ways the original virtual business, and are reliant on a great deal of data mining and interpretation of prior events to hopefully narrow at least the range of uncertainty about the future, where the real money is at stake. This reality, coupled with the difficulty of creating “safe” industry wide conversations and exchanges of data (owing to anti-trust and other regulatory constraints) means that dealing with new classes of risk and/or delayed development of risks that you thought properly underwritten in the past, can often be quite difficult. One company alone is highly unlikely to have the robustness of knowledge required to craft a way forward.
What can be effectively accomplished by working with a partner such as UNEP FI is a collection of the judgments, what I referred to not so elegantly earlier as the “underwriting guides in the head”, to promulgate a set of Principles for Sustainable Underwriting that at high level offer companies useful guidance as to the integration of ESG risk management in their particular company. Additionally, the comprehensiveness of our global survey, some 2,600 pages of data from around the world, uniquely positions us to develop an evidence-based set of principles more likely to be accepted because of the substantial research that supports them.
And of equal importance, is the “signatory” element of such a process whereby companies commit to implementation of the principles in their own enterprise.
This has already been accomplished with much success in another of the financial services industry with The Principles for Responsible Investment, whose signatories now total over 600 firms, representing more than US $18 trillion in assets under management.
Finally, what are the UNEP’s plans for this global survey going forward? For example, will it be repeated, and, if so, how often?
As noted, step one will be using the global survey as a means of providing an evidence-based foundation for the development of Principles for Sustainable Insurance. There is some consideration for conducting the survey again in the future, but as of yet, these have not been thought through in detail.
Some early thoughts relate to how future survey work might be utilized to first measure change, with the hope that it shows up as “progress”! Secondly, we are exploring the possibility of developing surveys that operate on a “situational basis”, that is, presents a scenario involving ESG factors for one to underwrite with a view to measuring how the principles yet to be developed could best be applied in practice.
We hope to have a more concrete plan of action for moving forward on this future work by mid year.
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