Walking the Talk
Shelter from the Storm:
Overcoming Challenges to Build a Resilient, Sustainable Society

Amid new risks and greater uncertainties caused by extreme weather across the globe and rapid changes in society due to the digital revolution, Japanese non-life insurance giant MS&AD Insurance Group Holdings is aiming to create a “resilient and sustainable society.”

Shiro Fujii, director at MS&AD Insurance Group Holdings | Image credit: Sustainable Brands

As director (EVP at the time of the interview) Shiro Fujii told Sustainable Brands™ in a recent interview: “Insurance has always had a big role to play in supporting people that take on challenges. Providing products and services that address social issues will help prevent and mitigate disasters, as well as create a resilient and sustainable society in which people support each other.”

So, how should we manage the natural disasters and new risks intensifying inside and outside Japan? Naoki Adachi, a producer involved in sustainability efforts at Sustainable Brands Japan, asked Mr. Fujii about the role that non-life insurance companies should play, along with their purpose and significance, as society faces an era of mounting challenges.

Responding to an increasing number of natural disasters

Naoki Adachi: It seems like the climate crisis and accompanying extreme weather events are becoming a major business risk for non-life insurance companies. There’s been a tremendous amount of damage in Japan recently — i.e., major floods and three typhoons in the past two years.

Shiro Fujii: That’s right. Insurance payments for damages caused by natural disasters have increased significantly in recent years; and unfortunately, premiums have also risen. As an insurance company, we need to find the best solution for coping with this. We have to manage both social sustainability and our own sustainability.

In FY 2018, the insurance industry paid out 1.5 trillion yen (US$13.94 billion) for claims related to natural disasters, and this was a record high. Analysts expect the figure to exceed 1 trillion yen (US$9.29 billion) again in 2019. This amount is down from the previous year; but before 2018, the non-life insurance industry in Japan had never paid out more than 1 trillion yen for damage caused by disasters involving storms and floods.

The industry faces two problems: If fire insurance premiums continue to rise, customers won't be able to afford the purchase of such insurance. On the other hand, non-life insurance companies won't be able to provide insurance without premiums corresponding to the risk.

In the U.S. state of Florida, which is often damaged by hurricanes, barely any private non-life insurance companies offer coverage any more — the state government handles insurance. Consequently, insurance payouts have become inadequate.

If damage caused by heavy rain and typhoons keeps increasing in Japan, the point may come when non-life insurance companies can no longer provide insurance that fully covers the risks posed by natural disasters.

The government of Japan and private insurance companies are already running joint initiatives for earthquake insurance. The 1964 Niigata Earthquake produced the Act on Earthquake Insurance. The amount of insurance paid out for the 2011 Tohoku earthquake and tsunami topped around 1.3 trillion yen (US$12.08 billion), but private insurance companies only footed some of the bill, due to the government's support through reinsurance. These arrangements meant that coverage options and payments were sufficient.

Adachi: I see. With natural disasters expected to intensify due to extreme weather and climate change, the response from non-life insurance companies will become even more important. There’ll be a huge social impact if you can’t offer insurance.

Fujii: The most-important aspect of the insurance business isn't simply compensating for loss; it's protecting customers from loss by working together on measures to prevent and reduce damage from disasters. Insurance will be there to provide compensation if losses occur despite these measures.

We're taking the same approach to climate change. We support the Task Force on Climate-related Financial Disclosures (TCFD) and engage in initiatives for mitigating and adapting to climate change. Rising temperatures are increasing the risk of flooding. We're working with the University of Tokyo and the Shibaura Institute of Technology to conduct research on improving global flooding risk forecasts and impact assessments. We want to use these improvements to support the use of climate-related disaster forecasts in management strategies and business investment.

We're currently holding internal discussions on our use of coal-fired power generation. The Japanese government has positioned coal-fired power as a major source of energy in its fundamental energy plan; however, many Japanese companies are trying to decrease their reliance on this form of energy. We’re taking these discussions very seriously.

We also believe it’s important to participate in initiatives to reduce disaster risk, such as Ecosystem-based Disaster Risk Reduction (Eco-DRR).

Adachi: One of the priorities of this ecosystem-based work is to improve the sustainability of natural capital. Why focus on natural capital?

Fujii: I believe that the preservation of biodiversity and health of the Earth form the basis for achieving a resilient and sustainable society. The ways in which we manage natural capital, such as water and forest resources, are now an essential part of business discussions. The degree of climate change occurring means that this isn't easy, but I believe that businesses must think about creating mechanisms for sustaining ecosystems and food chains and incorporating initiatives into their operations accordingly. We’ll work to improve the sustainability of natural capital through the business activities (such as consulting) of our entire group.

As part of this effort, we developed an “animal alert” app with an automotive insurance company, in working to prevent traffic accidents that kill wild animals. Traffic accidents are one of the greatest causes of the death of wild animals. For this, we used data from the government of Japan and local governments to develop a function that provides voice alerts when drivers approach areas in which vehicles frequently hit wild animals, and we loaded this data into our exclusive driving recorder and smartphone app. The sound of the alert changes in accordance with the animal appearance rate, which is based on life cycles, time, and the weather.

Need for change when society changes

Adachi: So, we can also contribute at these points where we intersect with wild animals, right? And speaking of automobile accidents, vehicle insurance is the biggest earner for non-life insurance companies. But the environment surrounding the automobile industry is changing radically. The electric car that Sony announced at the CES trade show in Las Vegas in January attracted a lot of attention. AI-based automatic driving technology is advancing, and vehicle accidents are decreasing. How might this affect business?

Fujii: If every car in the world was self-driving, car accidents would be close to zero. That’s great for society. Fewer accidents and disasters would make non-life insurance companies happier, too. That's because an insurance payout for something like a house fire can’t replace the lost memories.

Automatic driving might reduce the need for vehicle insurance, but society will change and other types of insurance will be required. It's going to be a while before all vehicles are autonomous. Until that happens, risks will remain, because self-driving vehicles will share the road with conventional vehicles. Authorities will create various measures, such as dedicated lanes, but these won’t eliminate all risks.

In the future, edge computing is likely to provide systems that control self-driving vehicles by making decisions like humans. However, they could be prone to programming errors or hacking. No one can say that there won’t be accidents.

Although revenue from automobile insurance might decrease, the products and services of insurance companies will change with society. There are also aspects of automobile accidents that only insurance companies can provide for, including negotiations with the other party.

Adachi: You're also engaging in new communication initiatives. Your 2018 advertising campaign — "For a Better Future" — used full-page ads to highlight the following: extreme weather as a regular occurrence, Japan's super-aging society, natural capital, the threat of cyber-attacks, and resilient urban development. The solutions that MS&AD can provide through its business were printed on the back of the page. You received the Award for Excellence in the Financial Sector at the 68th Nikkei Advertising Awards at the end of last year. We were surprised that an insurance company would state the risks so definitively.

Image credit: MS&AD Insurance Group Holdings

Fujii: In today's society, it's important to accurately convey the facts — including the risks.

Our mission is to leverage our global insurance & financial business so as to provide safety and peace of mind, as well as to contribute to the development of a vibrant society and to help secure a sound future for the planet. To achieve this goal, we will address the risks arising from the social issues that challenge us and will provide products and services to overcome these issues. Through these initiatives, we will create an environment in which our customers can thrive and conduct their business activities with confidence. The risks presented in our advertisements were focal points for stories in which we create shared value with society.

First, our job is to make everyone aware of the risks. Next, it's essential that we encourage everyone to engage in disaster readiness and safe driving so as to prevent and mitigate damages from such. This is nothing special needed, but it can be very simple and basic, such as in: “Please drive carefully” and “Take care when starting and putting out fires.”

Thinking about the role of our company, we don’t see ourselves simply as an insurance provider, but as a risk solutions expert. Insurance payouts are part of our business, but essential aspects can be found before such payouts occur. In advising customers on risks, we convince them such that they need to understand the risks that they might be exposed to, and we encourage them to consider whether they can manage those potential risks on their own. Most important is a form of accountability that can enable customers to make their own informed decisions, and this also has huge impact on brand building. A brand is built on trust and on a promise between the seller and the buyer.

Adachi: My image of insurance was that it’s quite a passive business, but are you in fact talking about actively building a resilient and sustainable society?

Fujii: That’s right. Insurance is here to support individuals and businesses taking on challenges. Challenges involve risks. Thinking back to where insurance originated from, it is believed to have begun in the 12th-13th century marine trade with “adventure loans” — an arrangement to cover repayment for the ship and cargo in the event of a shipwreck or other misfortune. The foundation of insurance is supporting adventurous initiatives, which helps with the development of society.

Adachi: Amid the rapid changes in business and lifestyles to come, I feel that the attitude of supporting those taking on challenges is very much in tune with our times.