Risky weather and the long-term view

With 300 years of business behind it, Royal and Sun Alliance knows a bit about weathering storms. Chief Executive Bob Mendelsohn sets out his strategy for managing climate change and more, in an interview with Martin Wright.

As claims for storm damage mount, say environ-mentalists, the world’s great insurance companies are in for a hammering from climate change. It’s a statement trotted out with increasing frequency. And it’s one with which Bob Mendelsohn, chief executive of Royal and Sun Alliance (R&SA), takes exception.

“Climate change is not a life or death business issue for us. Just think about what insurance is. It is about risk transfer -people who cannot afford to take a risk will pay a premium to someone who can. From an insurer’s viewpoint, climate change simply means there’s more risk in the world, and so there is more risk cover. If climate change creates a tremendous upsurge in risk, then as night follows day, an increase in premium rates will follow the incidence of claims.”

“So it’s not necessarily a bad thing for our business. You could even say it reminds people why they want to have insurance. There is nothing like having your house washed away in a flood to make you want to buy insurance the next time around.” In his post since 1998, Mendelsohn has taken over the helm at a time when R&SA is fighting to turn around its image in the financial pages as something of a laggard.

So you could say he’d be forgiven for seizing on every opportunity to make a sale. But climate change as a marketing tool? “Well to be honest”, says Mendelsohn quickly, “I would rather market in other ways, but the truth of the matter is that whenever there’s a disaster, our sales go up!” Robust to the point of flippancy? Not really, because Mendelsohn is at pains to point out that R&SA does take the issue seriously. “We see our role as working with people to minimise the impacts that climate change will have on them. We can’t stop the wind or the rain, but we can prevent them doing as much damage as they would otherwise, by, for example, working with people on how to build hurricane-resistant homes, and to repair them properly. We have a major initiative underway with the Red Cross on exactly that.”

But wait a minute: if all that extra wind and rain is caused by global warming, surely the answer is to deal with the cause, not just the symptom: shouldn’t R&SA be cajoling their clients to cut back on all those carbon emissions?

“There is still a lot of uncertainty surrounding the whole topic, ” responds Mendelsohn. “We’re supporting research to determine the connections between greenhouse gas emissions, climate change and associated impacts My own personal view is that the information could be a lot better.” So you’re not going to advise your clients to move to less carbon-intensive methods? “Not at present. We can help them mitigate risks of all kinds whether they arise from climate change, new patterns of habitation or whatever. We can help them make sure that they are not going to have an oil spill from a tanker, for example. But we aren’t about to go to the local petrol station and tell them to stop selling petroleum-based products, or to switch to solar power. That goes beyond our role. We have not taken that step and are not likely to in the foreseeable future.”

It’s a robust attitude that may not win Mendelsohn instant applause from Greenpeace. But it does chime with an approach to environmental issues generally that sets them in the context of R&SA’s history. “This company has been in business for almost 300 years, which in itself is extraordinary. It maybe helps us take the short-term reversals with more of a philosophical calm than some of our competitors! But as with any business, we face that classic dilemma of trying to do things in the short-term that will produce the kind of earnings and results that will get the market to look at us favourably, while also doing the things we need to build the long-term franchise value of this organisation. And, arguably, our environmental programme fits into that longer-term view. It’s just part of our normal business processes.”

It’s a view mirrored in the company’s support for Mission Antarctica - the explorer and environmentalist Robert Swan’s work to safeguard the world’s last great wilderness from exploitation and destruction. “He’s called his boat ‘2041’, because that’s the date when the Antarctic Treaty (banning mining and mineral extraction) expires. He’s trying to educate the generation that are going to be in power then to ensure the protection continues.” The long-term stuff again? “Absolutely. And it’s also a way of bringing some real focus - and some fire - to the huge appetite which staff have for getting involved in environmental activities.”

It is, of course, one thing to draw excitement and inspiration from the likes of Robert Swan. Quite another to build environmental responsibility into the humdrum reality of everyone’s day-to-day jobs. Yet this is essential if it’s ever going to get ingrained in company culture. “It’s a real challenge”, Mendelsohn is quick to acknowledge. “But we’re approaching it in just the same way that we tackle every issue facing the company, and that’s through the ‘group practice’ method. This involves taking people in each of the countries around the world who are expert in a particular thing - it doesn’t matter what it is - and making them the decision-making group for the corporation in their area of expertise. So rather than me having a committee sitting in a room in this building in London dealing with global environmental issues, we have a Group Environmental Practice that has people from the US, Asia, Europe, wherever. And that’s our group for establishing policies and, most importantly, sharing knowledge. So as a company we can learn quickly which projects work where, and which don’t.”

Unlike some other big creatures in the financial sector, R&SA aren’t exactly trumpeting their environmental efforts from the treetops. Get the basics right first, and get the staff to own them, seems to be the priority.

And some of those ‘basics’ are pretty sophisticated. Business units are appraised using a ‘balanced scorecard’ system, with a mix of ‘hard’ goals - such as financial performance - and ‘soft’, behavioural ones. This year, for the first time, the environmental measures are being included. Meanwhile, environmental specialists are working within key project areas to ensure environmental issues are not just pushed into a separate unit distinct from strategic developments. Through an e-business initiative, it was noticed that there was interest in an internet portal aimed at providing information for environmental professionals in commercial organisations. Utilising existing expertise and systems, it proved relatively straightforward to get the whole thing operational within months. Opportunities have also been grasped on the product development side. The UK commercial arm of the company developed an environmental impairment liability insurance product tailored to meet the needs of the property investment community. This involved drawing together environmental risk expertise in underwriting, claims and survey, and utilising the output from a proprietary geographic information system.

But back to climate change. If it can motivate sales, albeit in rather a negative way, will we also see some more proactive green marketing? Mendelsohn’s not convinced. “The world out there is interested in the hard issues. How we are going to consistently deliver good returns on capital.” Fewer than 5% of policyholders, he reckons, would choose insurers on ‘soft’ criteria such as the environment. “Most people make their decisions on two simple questions: ‘How much is my policy going to cost? And if I have a claim, are you guys going to be the ones that look after me?’ I think we have demonstrated that we can be pretty competitive on both of those. Whether we are a more environmentally responsible company than the other 200 that they could buy their cover from, to be brutally honest, comes far down on the list of the average consumer.”

“My belief is if we get the behavioural issues right within the company, then that will transform into better performance. But it will be the performance, not the behavioural changes, that will get most people excited.”

24 May 2001

Martin Wright