Corporate social responsibility and the insurance industry

by Hydery A. Rehmanjee

During the past five years or so the idea of Corporate Social Responsibility (CSR) has drawn the attention of senior management in companies everywhere including Sri Lanka.

It would be a challenge to find a recent annual report of a large company which does not fail to make mention of its commitment not only for profit but also to "service to the community". Such reports often talk of efforts to serve the community, society and safeguard the environment.

Large firms nowadays are called upon to be good corporate citizens and they all want to show that they are in fact so. We have consultants to advise companies on how to do CSR and, equally important, to let it be known that they are doing it. Some of the larger companies even have senior executives with special responsibility to develop and coordinate the CSR function.

At one end of the broad span of CSR are corporate policies that any well managed company ought to have in place anyway, policies that are called for, on any sensible view of business ethics or good management practice. These include treating one's customers and employees fairly, not condoning corruption and looking at least a little beyond the current "financial year" of the company.

Many CSR policies are motivated by genuine concern for the intended beneficiaries or by a conscientious belief that business must earn the respect of society for its survival. But there can be other motives for CSR too. Quite a few Chairmen and CEOs of companies may use CSR to draw public attention to themselves and promote their own image. Certain others having climbed their way to the top may find running a profitable company too small a test of their success.

If one were to ask a CEO for details of a company's CSR policies, and for their business rationale one will find that every company believes that CSR actions fall in the win-win box situation.

No CEO would like to believe that at least some of the various services to the community might actually not be in the public interest or that his "enlightened management practices" might reduce profits.

A very good example of the former was the recent warning by the Food and Agriculture Organisation of the United Nations (FAO) to the Ministry of Fisheries and Aquatic Resources that the over replacement of fishing boats as tsunami relief, by organisations, could contribute to over fishing and result in long-term damage to fisheries resources in certain coastal areas in Sri Lanka.

As many CEOs would point out, even an outright payment is not without business benefits, which will include promoting the visibility of the company and raising its image in the eyes of the public. However, whatever the intentions the real measurable position is that most cash donations out of profits do represent a net loss of profits. What then one might ask could be wrong with that.

What is wrong with a company giving part of its profits, for instance, to help victims of the recent tsunami disaster? A good cause if there was one. After all the enlightened company is giving some of its earnings to make the world a better place.

When considering corporate philanthropy it is necessary to have a clear understanding between the responsibilities of government and business. Governments which are accountable to the country and its people should decide on public policy. CEOs who are accountable to their shareholders should run their business.

The world's most famous philanthropist who established the Bill and Melinda Gates Foundation with its endowment of US$ 27.0 billion did so not from the profits of the companies he was associated with but from his own private wealth. This is different from a vicariously charitable CEO spending money belonging to the owners of the company who have placed him in a position of trust to safeguard their interest.

The crucial point is that CEOs of public companies do not own the business they manage. Therefore when they use their shareholders' assets for any other purposes they must be able to demonstrate very good reasons for doing so.

Insurers are perhaps uniquely placed when compared to other businesses in that their success can be based on the recognition that insurance is an essential community service.

Through insurance, customers pool their risks giving protection to those who suffer a loss. There are clearly social benefits from a system which shares losses in this manner.

CEOs of insurance companies can, by simply managing their business efficiently, contribute significantly to the public good. They can do this in many ways, the most important of which are : The reason customers pay premiums is the knowledge that if they experience an unforeseen loss the insurer will pay their legitimate claim in a fair manner and promptly.

When a insurer compensates the factory owner whose factory is destroyed by, for example, a fire, The insurer also ensures continuity of the industry as well as income for those dependant upon it directly and indirectly. It stabilises the economy of the area, by pricing risks, that is calculating the premium for the insurance cover. Here insurers will have to strike a balance between under-pricing and overpricing.

The former may affect the security of the insurer and thereby its ability to pay claims whereas the latter will raise the question of affordability of insurance protection.

For the community, pooling and diversifying risk will reduce the cost of insuring against those risks. Both corporates and individuals can exchange uncertainty for certainty. In return for a definite loss which is the premium, the insured is relieved from a potential larger loss. Insurers can by using past experience of losses as well as their own expertise, advise companies on how to manage the risks which could threaten the assets or earning capacity of the enterprise.

Active participation in and support to measures aimed at reducing accidents including those on the highways as well as workplaces. Such measures, help the community by reducing or eliminating the economic losses as well as physical and mental trauma following these occurrences.

Insurance companies have at their disposal large amount of monies. This arises due to the fact that there is a time period between the receipt of a premium and the payment of a claim. Insurers also need to maintain considerable reserves to meet future liabilities.

Insurance funds represent a large pool of capital, which government as well as business will have access. The use of this capital can help in developing the economy. The return from the investment of these funds will reduce the price of insurance as well as assist in providing a reasonable return to the shareholders.

Life Assurance is a method of saving not only to provide for retirement or redemption of a liability such as a housing loan, it also guarantees financial security to dependants in the event of untimely death or disability of the life assured. The development of Life Assurance can be a very important means to improve Sri Lanka's savings ratio, which is low compared to even India and Pakistan, notwithstanding, both these countries having lower per capita incomes.

(The writer is a Fellow of the Chartered Insurance Institute, London. He was the CEO of Union Assurance for nearly 12 years. He continues with Union Assurance as a Director.)