Global Warming and Insurance

We are told that under climate change typhoons will become more frequent and more powerful. These changes will become evident in payouts from insurance companies. Graph 1 shows the economic losses resulting from large disasters such as typhoons and hurricanes, calculated for each decade from the 1950s through the 1990s. One can see that the losses have increased significantly in recent years. A large proportion of these economic losses are paid out from insurance companies in the form of insurance payments. You can imagine that for insurance companies, global warming is a matter of grave concern.

 Graph 1

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In recent years, more and more large losses may be attributable to climate change. In 2002, the cherry blossoms fell before the end of March in Tokyo, earlier than usual. I think that anyone can feel that something is amiss with the climate. We may not know for certain if what we see are the effects of global warming, but people do have a sense that something unusual is going on. And these issues are something that insurance companies simply cannot ignore.

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Growing Environmental Risks

I would like to explain how environmental risks for corporations are growing dramatically.

- Extended Producer Responsibility

"Extended producer responsibility" is one concept that is moving us toward a recycling society, and it involves heavy responsibilities for manufacturers. Japan recently passed an Appliance Recycling Law that requires consumers who want to dispose of appliances such as televisions, refrigerators, washing machines and air conditioners to pay a fee to an appliance dealer, and to return the product to that dealer. Appliances that have been collected in this way are brought back to the manufacturer, who must recycle by dismantling them and re-using the parts that can be used again. When consumers want to dispose of appliances now, they have to pay the recycling fee, and bring them to the dealer. The dealer must properly deliver it to the manufacturer, and the manufacturer must properly recycle it. Everyone's responsibility has increased. I mentioned the term extended producer responsibility, but the responsibility is not only for manufacturers. It is also for dealers and us users too who must bear the burden. But for manufacturers the new law now means that they have a heavy responsibility to recycle the products that they have manufactured. In ways like this, manufacturers' responsibility is tending to increase.

- Soil Pollution

A second issue is the problem of soil pollution. It is said that about 440,000 sites in Japan have contaminated soil in 2000. This has become a huge issue in recent years. To give one example, a few years ago there was an apartment building being constructed in Osaka's Toyonaka City, and soil pollution was discovered only after the construction was 70% complete. The project was halted, the building torn down, and now there is really no way to use the land.

If a location was formerly a factory site, it appears safe to assume a relatively high likelihood that the soil is polluted. In the past there was not much awareness about soil pollution, but in recent years more foreign investors have been coming into Japan, and they often consider buying land or a whole factory. Because soil pollution has been a huge problem for American and European companies operating overseas, when they are considering buying land or a factory, it is common sense for them to investigate first to find out whether the soil is polluted or not. If the land is polluted, the key issue is who will pay the cleanup cost. If the soil is found to be polluted, the contract price will be reduced to cover the cost of a clean-up. Alternatively, before completing the sale, the vendor is required to do the cleanup and guarantee that no pollution remains. Because today it is impossible to close a deal without such arrangements, soil testing has suddenly turned into a booming business.

That is the reality today. And in fact a draft Soil Contamination Countermeasures Law has been proposed at the current Diet session, and is moving toward enactment [enacted on February 2003]. This law will give prefectural governors the power to order land owners, tenants, or managers to remove pollution or take other measures in cases where soil pollution has been discovered and concern exists about potential dangers to human health.

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Initiatives of Yasuda Fire and Marine

- History

Yasuda established a dept. of global environment in 1992, and one could say that our efforts started here. It was Mr.Yasuo Goto (then president of the company) who established the department.

You have probably all heard about the Earth Summit that was held in Rio de Janeiro in 1992. Ten years have passed since that summit, and a new Earth Summit will be held from the end of August until September 2002 in Johannesburg, South Africa. Because ten years have passed since Rio, it is being called Rio+10. Mr. Goto served as the head of the Keidanren [now known as Nippon Keidanren, Japan's largest federation of corporate organizations] mission to Rio, and returned to Japan with a strong personal conviction about the seriousness of environmental issues. Immediately after returning, he established the dept. of global environment. In those days, there was not even a whisper about non-life insurance companies being involved in environmental issues, so this was quite a big deal inside the company.

Automobile insurance accounts for the biggest share of business in the non-life insurance industry in Japan. Ten years ago there was already an awareness that automobiles had a large negative impact on the environment. And because vehicle exhaust was seen as a major cause of pollution, people within our company were concerned that if insurance companies were going to address environmental issues, they would run into resistance from automobile manufacturers and dealers. There was debate within our company-Why should a non-life insurance company have to deal with environmental issues? But as I mentioned earlier, under the leadership of our company president, we were able to make a start. His position was that without a doubt environmental issues would become major issues in the future, so we had to start dealing with them."

A number of phases followed, but I see the period from 1992 to 1994 as the first phase, and 1995 as the beginning of the second phase. At our Data Processing center in Hoya City, now renamed Nishitokyo city ("West Tokyo"), in 1997 we were the first company in the financial and insurance industries in Japan to obtain ISO 140001 certification for environmental management system.

Today over 8,000 ISO 14001 certifications have been issued in Japan, which now has more of these certifications than any other country. And it is not only manufacturers but also other bodies, such as local governments and financial institutions like us, that have obtained this certification. The fact that Japan has a large number of ISO certifications said to be one sign of proof that it is an advanced country in terms of environmental initiatives.

During the third phase, starting in 1998, we launched a strategy of being a "Caring for People and Nature." The outcome was that our company-wide environmental initiatives now focus mainly on our actual business dimensions.

More specifically, we are following three approaches. The first is providing new products and services that are environment-related, and these relate to the very core of our business. The second is reducing environmental impacts. The third is contributing to society. I would like to focus on each of these three points and describe in detail what we are doing.

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Provision of Products and Services

- New Insurance for Soil Pollution

First, I will talk about some examples of our new insurance products and services. One is a new insurance product relating to soil pollution. Earlier I explained some issues with soil pollution. If soil pollution is present, land transactions can be completed only with great difficulty. Basically, without testing it is impossible to know whether or not soil is contaminated. But it is impossible to turn over and test every square centimeter of soil at a site, so testing for soil pollution involves "polling" of certain spots. We can tell whether or not the actual spots polled are polluted, but because it is impossible to conduct polling everywhere at a site, naturally the polling must be done at a finite number of spots. If the spots tested are not polluted, it is assumed that the entire site is not polluted. But because pollution could be discovered at a spot on the site where polling was not conducted, the question is how far should one go with polling.

If, for example, a factory site is to be sold, even if the polling has found no soil pollution, the buyer will still have some concern about his risk. We have created a new kind of insurance to answer such needs. This insurance is for companies that specialize in testing for soil pollution. If the testing company discovers polluted soil, we estimate the costs of removing that pollution. If, for example, the actual cost of pollution removal actually turns out to be 150 million yen where it had been estimated at 100 million, an issue arises: Who will pay the extra 50 million yen? The insurance product that we created is to cover that difference of 50 million yen. We can make a business of ensuring that the land vendor and purchaser do not have to bear any costs exceeding the amounts stated in their contracts. Through this product, we can expect more activity in real estate transactions.

We are told that Japan's economy is still in a slowdown. One reason for this is that land transactions are stagnant. One cause of this stagnation is said to be soil pollution, so by creating this insurance, we think that we will also help to revitalize the Japanese economy.

- Eco Parts Project

Next I would like to introduce our Eco Parts Project. As I said earlier, automobile-related insurance accounts for a major proportion (about two-thirds) of the sales of Yasuda Fire and Marine and Japan's other non-life insurance companies. One key mission of non-life insurance companies is to provide compensation in the event of an accident involving vehicles. If a collision causes damage to a vehicle, it is necessary to repair the damage. The Eco Parts Project involves asking customers to use recycled parts for the repairs. For example, a repair proceeding that would cost 100,000 yen might cost only 70,000 yen if recycled parts are used. The difference is 30,000 yen. If recycled parts are used, the insurance amount paid out by the insurance company will be lower, but this approach would mean that only the insurance company benefits. A simple solution would be to return the 30,000 yen to the customer, but Japan's Insurance Business Law prohibits insurance companies from providing special profits to customers, so we cannot do that. We donate through the Yasuda Fire & Marine Environment Foundation the 30,000 yen to non-profit organizations dealing with environmental issues in order to contribute to promoting measures to help the environment instead.

- Eco Fund (The Beech Forest Fund)

Next is a product called an "eco fund," which is an investment trust. An investment trust is an institution that collects funds from the public, and invests them. It works similarly to purchasing stocks or bonds, but this is a system of returning profits from operations back to the people who have made the investment. The eco fund is a system that takes the funds collected, invests them by purchasing stocks of exemplary companies that are tackling environmental issues, and returns the profits back to the investors. In 1999 we nicknamed this eco fund "the Beech Forest Fund" and launched sales. It has become a huge success.

There is one assumption that we made when we developed this product: "In the medium and long term, the corporations that actively tackle environmental issues have high growth." In the short term, there are mountains and valleys in the economy, and one cannot guarantee that stock prices will rise under current circumstances. But we believe that companies that tackle environmental issues aggressively will without a doubt grow in the medium and long term, and their stock prices will rise. We have bought stocks of about 50 or 60 companies with the funds collected from investors in the Beech Forest Fund.

Now I would like to describe the actual operating results of this product. When it actually started in 1999, TOPIX (the Tokyo Stock Price Index) was rising faster than the Beech Forest Fund. After June 2000, this trend was reversed. With the recent Beech Forest Fund price at about 8,000 yen, because the Japanese economy is currently not doing well and stock prices are down, if a person bought at 10,000 yen in October 1999, he would be seeing a loss of 2,000 yen today. But the Beech Forest Fund has been outperforming the TOPIX.

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One might ask what was the meaning of an eco fund like the Beech Forest Fund. I have two points to make here. First is that until we created the fund, no similar financial product existed. A "green consumer" is a consumer that is aware about the environment. If investors exist that are aware about the environment, we could call them "green investors." In the past we were told that there was no such thing as a green investor in Japan. Before putting this product on the market, some people were saying that even if you offer it no one would buy. But after we made our best effort with this product, there was a huge response. As a result, with our track record we were able to prove that green investors did exist in Japan.

Another point is this. Initially, it was very difficult for a financial institution to deal with environmental issues as part of its business. But we showed that such an institution can address environmental issues by creating a product of the Eco Fund as part of its main business. Since then, many products similar to the Beech Forest Fund have been launched in this industry and the market for this kind of product in Japan has grown to 130 billion yen.

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Contribution to Society

- Seminars on the Environment for Citizens

This is the tenth year since we started our series of Environmental Lectures in 1993. We started them in cooperation with an NPO known as the Japan Environmental Education Forum, to help raise public understanding about environmental issues. They were popular, and over 7,000 people have participated to date. The series will start in the autumn of 2002 and run about ten times, until March 2003.

- The CSO Learning Program

I hope that students will be interested in this one. You can think of a CSO as exactly the same thing as an non-governmental organization or non-profit organization, but both "non-governmental" and "non-profit" start with a negative definition of what they are not. This could create the misperception that NGOs activities are anti-governmental, or NPOs activities must absolutely not turn a profit. So we thought the term "civil society organization" might be better. CSOs support change in Japan and will be a major driving force as we evolve into a new society, so Yasuda Fire and Marine is paying them a lot of attention.

Our CSO Learning Program is a system that offers interested students, who will carry society forward in the future, the opportunity to work at CSOs. We started this program in 2000. I think that the experience of working at a CSO has great significance for the day when students enter the working world and become leaders in society, and I think that their experiences will help to change the world.

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Our "Caring for People and Nature " Strategy

In 1998 we established our "Caring for People and Nature " strategy. This slogan reveals our goal, but behind our choice of this strategy is the background of worsening environmental issues. Another factor is the rise of the green consumer and civil society organizations. We are predicting that they will become even more prominent in the world in the future. If we are right, then by tackling environmental issues and properly fulfilling our corporate social responsibilities, we will be more trusted and appreciated by green consumers and local communities. As a result, it is our hope that Yasuda Fire and Marine will be the company of choice when people come to think of non-life insurance.

Under present circumstances, I think that profits will decline in the short term if a company actively tackles environmental issues. It is exactly because of this that strong leadership is needed from the top management of companies in order to tackle environmental issues. Thus, when thinking about not the short term view but the prospects for the medium term, if Yasuda Fire and Marine is to survive in the twenty-first century it is important for us to address environmental issues and to fulfill our social responsibility.

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