**3. The role of the insurance sector in sustainable development**

Insurance companies - life insurers as well as providers of property and casualty, health, and financial coverage - perform important economic functions and are big players in financial markets. They enable economic agents to diversify idiosyncratic risk, thereby supplying the necessary preconditions for certain business activities. They are a major source of long-term risk capital to the real economy, and are among the largest institutional investors [19]. The overall assets invested by the insurance sector in 2018 were more than 32 trillion US \$ [20].

Although the insurance sector is generally seen as a part of the financial sector there are, however, some peculiarities. Essentially, insurance is the process of an exchange of unpredictable financial risks (whether for individuals or for institutions) against a fixed monetary premium. The statistical basis for insurance to work economically sufficient is the famous law of large numbers discovered by Jakob I Bernoulli in the late 17th century [21]. Therefore sophisticated actuarial risk models and elaborate statistical calculations are a fundamental basis of insurance [22]. While the actuarial processes for insurance have been in continuous development since early on, it really took until the second half of the twentieth century for a modern theory of insurance economics to emerge [23]. The central idea here is the concept of risk diversification, which also plays an essential role in insurance regulation. Since in particular life insurance requires an utmost degree of safety in financial asset investments, governmental regulation is of great importance here; and has been set to work in almost all developed countries over the world. In Europe, this was accomplished by the Solvency II project finalized in 2016 [24].

The investment strategy (asset management) of insurance companies is limited by regulations and driven by a number of internal and external factors [25].

Insurers must invest conservatively. They must ensure that they remain solvent throughout and are able to make their payouts to the policyholders with the highest probability at any time. Insurers have a fiduciary obligation to keep or augment the value of their 'policyholder' assets. This poses constraints on the industry's investment strategies.

Furthermore, insurance regulators impose risk-based capital charges on investments to ensure adequate capital levels to cover insurers' liabilities; the riskier the investment, the higher the capital charge. These vary by country and region. It is important to note that different lines of business are exposed to different risks. That is why financial risks associated with assets and liabilities are managed differently by life and non-life insurers. Specifically,

#### *Risk Management*


The discussion of sustainable developments in the finance sector as outlined in the preceding section has, of course, also reached the insurance sector. Firstly, one can distinguish between sustainability risks and opportunities on the asset side and on the insurer's liability side [3].

Major issues that can potentially arise from sustainability risks on the asset side include credit risk, market risk, liquidity risk, insurance risk, strategic risk and reputational risk. The German supervisory authority BaFin [26], p. 18 provides the following ostensive examples:


#### *Insurance Business and Sustainable Development DOI: http://dx.doi.org/10.5772/intechopen.96389*

Important issues that can potentially arise from sustainability risks on the liability side include natural catastrophes due to windstorm, hailstorm and flooding. Beyond insured losses from physical climate damages, climate trends and shocks can cause far-reaching economic disruptions. The insurance "protection gap" for weather related losses remains significant, with roughly 70% of losses uninsured. This leaves significant burden on households, businesses, and governments. Uninsured losses arising from physical risks may have cascading impacts across the financial system, including impacts on investment companies and banks. Likewise, the availability of insurance – or risk of uninsurability due to high physical risk profiles – can have significant impacts on the performance of credit and investment across the economy (including, for instance, mortgage lending) [27]. Historically, insured risks from natural disasters were to a great extend covered by world-wide operating reinsurers with a high grade of global diversification. In the recent years, new financial products were created shifting insurance risks to the financial market, e.g. cat bonds or other climate related derivatives [28]. However, as the severity and frequency of significant natural disasters increases, the availability and cost of reinsurance cover for weather-related risks may become prohibitive for smaller insurers in certain markets – potentially leading to a reinsurance gap [27].

Another possible threat is a rise in mortality due to climate change. Extreme high air temperatures contribute directly to deaths from cardiovascular and respiratory disease, particularly among elderly people. In the heat wave of summer 2003 in Europe, for example, more than 70 000 excess deaths were recorded. High temperatures also raise the levels of ozone and other pollutants in the air that exacerbate cardiovascular and respiratory disease [29]. Life and health insurers are in many cases just beginning to explore the impacts of climate factors on their underwriting portfolios. The potential impacts of climate change on mortality – in particular due to extremes in weather events like excessive heat – are coming into the focus of actuarial associations, who are exploring the matter in relationship to insurance, annuity and pension programmes [27].

Besides the pure monetary aspects of climate change risks and their management, also other ESG criteria have recently come into the focus of the insurance industry and their supervisors. An important lesson learned is the need for financial supervisory authorities, as well as the supervised companies, to be deeply engaged in efforts that incorporate ESG risks into their business. This requires a profound change of mind-set within institutions. In order to attain this engagement, it is very important for supervisors to raise awareness of ESG issues through provision of information, guidance, and capacity building [27].
