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WORKS
[ ANALYSIS ]
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[ Last updated: August 11, 2009 ]
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Analysis of the Geneva
Association research report:
"The insurance industry and climate
change – Contribution to the global debate"
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The
Geneva Association
(1) is an international association of (80)
insurance industry CEO’s. The association, headquartered in Europe, studies insurance
economics and among other things provides “platforms for senior insurance executives
so they can exchange ideas and discuss key strategic issues”. The association
on July 2, 2009 issued a research report titled “The insurance industry and climate
change – Contribution to the global debate”. The report is described by
Geneva Association members as likely to “become a standard on this whole issue [climate
change] for the whole industry and beyond for the next years”. A copy of
the report is available from the association
here
(2).
My analysis of the association’s report is
as follows:
The report is a position paper. It's the industry group's position on
political economy
(3) given climate change. The subtitle of the
report is "Contribution to the global debate". The purpose of the
report is to frame the debate. They've succeeded.
The industry is taking the position that climate change is a business opportunity.
There is opposition to the industry position. The opposition wants to frame the
debate as primarily about corporate control over resources. Fundamentally, the issue
being debated is over whose political-economic model of the world prevails and it
is almost certain the insurance industry position will succeed. In the face of potentially
dramatic changes in the environment as a whole, climate change is a business opportunity.
Despite those arguments to the contrary, it's unlikely the industry will be
held liable, politically or otherwise, for the downside of climate change.
Still, it's fascinating to track the issue.
Climate change is shaping up to be the most wrenching challenge to the insurance
industry and its role in the world. The obvious is the potentially huge upstream
claims costs to reinsurers. For top management, from the Chief Executive Officer
on down it's a nightmare of epic portions for several reasons. The potentially
huge upstream claims costs to reinsurers may be dwarfed by the more fundamental
issue;
(a) Does climate change potentially threaten wholesale control over the world's
natural resources as corporate assets, and
(b) Could climate change potentially shake-up 600 year-old institutional notions
of corporate limited liability.
The insurance industry is fighting these challenges on all fronts, including updating
its global strategic position papers accordingly as evidenced by the attention
given the Geneva Association Research Report.
"The latest climate science strongly indicates that climate change is happening,
mankind’s influence is very material and the changes are occurring faster than earlier
projected. The prospect of extreme climate change and it’s potentially devastating
economic and social consequences are of great concern to the insurance industry.”
No industry strategists deny any point, nor question climate change, and all seem
to recognize that doing nothing risks irrelevance in the face of a fundamental challenge.
And, not conceding climate change as real and man-made would forfeit the initiative
to frame the debate and drive the discussion.
Footnotes (in advance):
During times of fundamental and systemic change, opposition to existing institutions
arise which questions the constitutional order of things. These questions force
high-level stakeholders in the existing power structure to re-engage in the basics
of leadership. Climate change is a fundamental challenge to the current constitutional
order.
So, where does this debate originate? My research shows the origin of the actual
situation began around 450 BC in Greece, when a person named Zeno of Elea, articulated
a set of riddles or contradictions. These contradictions came to be known as
Zeno's Paradoxes
(4). People discussed how to resolve the contradictions.
For instance, Socrates used one of Zeno’s paradoxes as the source of his method
to discover truth. Soon, the methods derived from discussing the contradictions
became a profession in itself and used by the first lawyers. Schools formed to teach
the art. Aristotle wrote books about the practical situations the contradictions
represented. Books called “Politics”, “Ethics” and “Rhetoric”. The first scientists
used Zeno’s riddles to begin describing the complexities of nature. Industries evolved
out of the process. Ever since then, through today, paradoxes have been used to
solve the problems in science and industry.
For the academic (big picture) track of what the situation is now, look at the work
of historians Tainter and
Toynbee
(5) in the matter. Their theories are pertinent.
These historians view the rise and decline of complex civilizations as being related
to the consequences of who in the society manages to define and implement the problem
/ solution reality of that culture. That's what the fundamental debate is about
today. We have a global industrial culture. Our culture has created climate change
risk. The global debate is what to do about it. It's an old fashion battle over
whose political-economic model will govern industrial policy going forward. The
Geneva Association report is the insurance industry's contribution.
The reason the insurance industry will win the battle is because they have already
successfully
framed
(6) the debate. Their message is the world needs
the insurance industry’s expertise to mitigate and adapt to climate change. My analysis
concludes this is a powerful message and will be successfully adopted in world culture
as the dominant problem / solution reality.
Opposition:
There are two sides to a debate. On this issue the mirror opposite of the insurance
industry position frames their view as the insurance industry being the problem
and that the industry has been for hundreds of years. Their solution to the situation
as they define it is to; (a) hold the industry politically liable for climate change
costs and (b) ultimately to render the industry irrelevant in the scheme of things.
The insurance industry and climate change debate is about resolving
relevance
(7). On the one hand, the insurance industry
is saying they are relevant to climate change as knowledgeable experts / risk managers
and they are business solution providers for the situation. On the other hand, the
opposition is saying to the insurance industry's relevance means responsibility
and accountability in terms of political liability for the cost of climate change.
To counter the opposition's liability frame, industry strategists in the Geneva
Association report applies indirection at least twice. First, by downplaying the
inherent moral hazard aspect of insurance and pointing instead to opportunity but,
then industry strategists frame the relationship with government policy-makers as
"partners" on a "transnational" basis. They seek
to do this by pointing out the fact the climate change problem is global and transnational
governance systems are needed to deal with the situation efficiently.
The mirror opposite position is to go after global economic activity itself as an
argument against the insurance industry position:
- Since the opposition can presumably establish global economic activity as the primary
cause of climate change in the first place, then all that’s necessary is to link
the insurance industry to global economic growth and establish industry (political
at least) liability for climate change costs,
their argument presumably to be linking industry liability via economic activity
as follows:
(a) The industry has already conceded climate change is real and man-made.
(b) Given the global economy is the cause of climate change.
(c) The insurance industry played a key role facilitating the growth of the
global economy.
(d) To the degree the industry benefited from the growth of the global economy,
the industry is responsible for the costs of climate change.
The opposition has a logical fundamental point here and it's possible that in
anticipation of the above line of reasoning there is an absence in the industry
report of the insurance industry's historic role in facilitating the growth
of the global economy.
Presume the following opposition argument:
(a) The global economy is inherently based on massive consumption of oil,
the carbon emissions causing climate change, etc.
(b) The insurance industry is tightly coupled with the global economy and
historically facilitated it’s fantastic growth.
(c) The insurance industry is therefore inherently based on massive consumption
of oil, etc, etc.
(d) The global economy and the insurance industry are too big and interconnected
to fail (systemic risk).
(e) ... the whole "corporatism" case is presented
here
(8).
In my analysis, the neither of the above opposition arguments, while logical and
engaging, will (at least anytime soon) succeed in supplanting the insurance industry’s
dominant frame. The one qualification to this conclusion being the possibility of
social collapse. Collapse, of course, is a legitimate part of the insurance industry
and climate change debate equation. It helps calibrate the parameters involved in
making decisions about what are practical solutions. The collapse case is presented
here
(9). Ironically, it's the possibility of
collapse that is driving current global leaders to act.
The Resolution = "Market State":
Global leaders have already established a new global goverance framework for managing
their costs. The 150 year-old nation state arrangement has stopped working for them
a while ago. The nation state basically cost the corporate sector to much. So, the
nation state is being replaced by a new global constitutional order called the “market state
"(10). Constitutional order shifts do happen
occasionally. They are non-trivial events in world history.
The market state is a collaboration of the state and corporate sector and appears
almost certain to be an historical inevitability. Basically, a market state is going
to be the new global problem / solution reality. This new political arrangement
is consistent with the insurance industry's frame and why my analysis arrives
at the conclusion that the insurance industry has already won the debate about its
relevance to climate change.
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My Value-Add Contribution to the Global Debate
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Resetting Insurance Industry Architecture
is a Solution
The solutions proposed in the Geneva Association report involve major initiatives
to re-focus industry investment into green endeavors and to rearrange the global
constitutional order in order to make the most out of those investments. The most
drastic solution implied is the possibility of removing corporate charters for certain
lines of coverage. However, resetting the industry itself, in terms of industry
architecture, specifically how the industry is organized to deal with data, was
not mentioned in the report.
My experience as the original insurance industry web developer/analyst has led me
to conclude that for the industry to succeed managing climate change risk for others,
it must also, at least in parallel to the initiatives mentioned in the report, re-resolve
it's own internal inefficiency paradox with data.
I offer the following (5) value propositions indicating exactly how the insurance
industry can reset itself to be better positioned to align as needed with the market
state governance model at the elemental communications level (data) and therefore
increasing the return on investment of the initiatives designed to manage climate
change.
(Value Proposition #1) Provide
and Consume Interoperable Services in Value Networks:
Imagine a new insurance industry eco-system based on value-added services.
Value network
(11) architectures are collaborations which
require a business "service" approach and a focus on interactions, configurability,
coherence, objectives and interoperable interfaces to those services. A value network
industrial architecture is aligned with new opportunity for independent intermediaries
in the market state. The old value-chain industrial structure is not aligned with
new individual business opportunity. The old value-chain construct; a) limited the
ability of independent insurance intermediaries to evolve as business entities in
an increasingly globalized, complex, interdependent business world, and b) dictated
simple, linear, process mentality type values - where each intermediary does their
own bit, with limited responsibility and autonomy, then passing the bit on to the
next one. The problem is the current business world environment is all about complex
sets of social and technical resources in collaborations to deliver value, not simply
about processes.
(Value Proposition #2) Have
a Standardized Data Model - Seriously Expand Markets:
This value proposition is probably the most technically difficult one to implement.
Standardizing the insurance industry data model (also called message schemas) is
a seriously problematic activity. However, it could be seriously productive in terms
of effectively expanding markets if done right. Done right means out of the hands
of the framers of the old insurance value-chain. In addition to expanding markets,
in the 'process' of solving the insurance industry data model problem, a
whole lot of old and wasteful insurance distribution problems and solutions are
rendered moot. Here’s a bold proposal; solve a new problem - start with microinsurance.
Endeavor to normalize the complexities of message schemas for insurance reporting
purposes in developed countries, by starting with an endeavor to define the simplest
possible canonical message schema for microinsurance. Microinsurance distributed
to the global working poor in the informal economies around the world. Effectively
expand the insurance marketplace to three or four billion people by resetting the
basic message schema for insurance services with the simplest possible data elements,
in the most transparent form possible and based on how the people at the very bottom
earn a living. Include the global working poor into the insurance industry value
proposition. Solve the problem of helping insurance industry operators in the developed
economies maintain their standard of living by helping people in the informal economies
in underdeveloped countries earn a living. Standardizing the insurance industry
data model based on microinsurance will resolve in enabling all the various administrators
of insurance schemes to efficiently communicate/report insurance data globally throughout
all the value networks of insurance services.
(Value Proposition #3) Globalize
Insurance Regulation - Service and Data Normalization:
Federalizing insurance regulation describes a process of licensing and oversight
of insurance companies and broker/agents by a central government authority as opposed
to by the local governments. Subtract the day-to-day political quibbles, and the
process of federalizing insurance regulation is just an instance of the
service and data normalization pattern
(12) in information technology. So, it makes
sense to normalize the all various legislative proposals around the world to federalize
insurance oversight. Normalize them all based on refactoring regulatory services
and data. The fact is, if you’re not refactoring functionality, you’re replicating
data. Accordingly, here’s a bold industry proposal. Solve the following two new
insurance regulation problems and in the process the old nation state regulatory
problem / solutions reality is rendered moot. • Problem 1: Establish a standard
data efficiency rating be assigned to any insurance legislative proposal in advance
of submitting the proposal. • Problem 2: Design a regulation legislation update
proposal ‘template’ which requires validated industry efficiency metadata before
submitting the proposal.
(Value Proposition #4) Have
a Standardized User Interface:
This particular value proposition, standardizing the insurance distribution user
interface, is the easiest to technically implement, yet still seriously difficult
because it requires cultural sacrifice. Easy because; a) standardizing the user
interface is just an implementation detail, and, b) framers of the old value-chain
will likely offer less resistance to this value proposition than the remaining operators
will. Still, this value proposition is seriously difficult because of cultural accident.
The accident was, framers and operators of the old insurance value-chain successfully
co-opted internet technology and utilized it with a storekeeper mentality. That
was waste of good technology. Internet technology is not just about providing a
storekeeper in a value-chain with a storefront. There is a remedy. Here’s a bold
industry proposal. The easiest way for insurance industry operators to free themselves
from the value-chain and begin to use internet technology to effectively earn a
living and/or maintain a standard of living based on the big picture is to standardize
the user interface (UI) of the insurance distribution system. A good place to start
the UI standardization process is via the W3C (the global Web standards organization).
The W3C recently announced new guidelines to help web developers create online portals
that better meet the needs of users with disabilities and with older users. Makes
sense, but whoever is going to champion this initiative better prepare for ferocious
kicking and screaming as value-chain operators realize they no longer need to express
their opinion about visual trivialities and instead need to focus thought on providing
complex, abstract business services within dynamic value networks. Standardizing
the insurance distribution user interface is the sacrifice remaining value-chain
operators need to make to free themselves from the tyranny of the chain processes.
(Value Proposition #5) Implement
the Identity Metasystem
Identity and access technology has advanced and matured. An “identity metasystem
”(13) is in place and agreed upon by all the
world's major software vendors. People and machines are now capable of federating
across the old and highly fine-tuned value-chain industrial framework solution boundaries.
The new capabilities challenge traditional insurance industry notions of solution
boundaries such as sales/underwriting, policy issuance, claims, etc. The new identity
metasystem capability is therefore challenging previous held assumptions about how
people earn a living and/or maintain a standard of living in a value-chain framework
type of industrial structures and operations. Further accelerating the movement
away from industries structures and operations based on old value-chain type solution
boundaries, is the fact that identity and access itself is now capable of becoming
a independent, interoperable “service”. These new capabilities are consistent with
the new emerging industrial economic model of value networks of services.
Updating identity technology in the insurance industry is problematic. The current
architecture of the insurance industry (‘Insurance Value Chain’) is a resolution
of an inefficiency paradox based on old identity technology. The new identity metasystem
is ultimately political. It changes who has to go to who on whose terms for what.
The insurance industry can't self-organize to be flexible and agile enough in
order to effectively address climate change risk because of an inherent mismatch
between how current industry institutions implement the canonical schema/data model
pattern and the new claims based identity metasystem. The insurance industry has
a global identity problem to solve before it can effectively provide services as
a climate change solution provider. That's a world-class challenge.
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Linked references:
(1) Geneva Association website: http://www.genevaassociation.org
(2) Copy of the association report:
http://www.genevaassociation.org/PDF/Geneva_Reports/Geneva_report[2].pdf
(3) Political economy: hhttp://en.wikipedia.org/wiki/Political_economy
(4) Zeno's Paradoxes: http://en.wikipedia.org/wiki/Zeno's_paradoxes
(5) Toynbee: http://en.wikipedia.org/wiki/Arnold_J._Toynbee
(6) Framing: http://en.wikipedia.org/wiki/Framing_(social_sciences)
(7) Relevance: http://en.wikipedia.org/wiki/Relevance
(8) Case here: http://rushkoff.com/books/life-incorporated
(9) Case here: http://cluborlov.blogspot.com
(10) Market State:
https://www.cia.gov/library/center-for-the-study-of-intelligence/kent-csi/docs/v44i5a09p.htm
(11) Value Network: http://en.wikipedia.org/wiki/Value_network
(12) Service and Data Normalization Pattern:
http://www.informit.com/articles/printerfriendly.aspx?p=1328796
(13) Identity Metasystem:
http://en.wikipedia.org/wiki/Identity_Metasystem
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Published:
22 July 2009 (Updated: 11 August 2009)
Format: Word, PDF
Length: 7 Pages
Type: Analytical Research
Language: English
Price: To be determined
Copyright Vinsurance.com, 2009 All Rights Reserved.
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