Entrepreneurs understand the fine balance between risk and reward, especially when it comes to doing business.
For purpose-driven companies who are innovating and taking risks in order to make the world better, the reward may include nothing less than helping save the planet itself.
But what happens when the insurance companies, a crucial component in the function of the economy, aren’t prepared to take the same risks?
Sparx Publishing Group spoke with James K. Asaad, President & Vice Chairman at Ferrari and Associates Toronto, who has extensive experience working with emerging industries, about the complex relationship between these businesses and the insurance industry.
The Current Relationship Between Insurance and Purpose-Driven Companies
As many business owners and seasoned entrepreneurs already know, securing adequate insurance coverage is a prerequisite to doing business. Insurance is embedded into every part of commerce and every transaction that takes place.
But what does insurance actually do for a company?
Put simply, insurance effectively takes away various elements of risk your business would otherwise be liable for, in exchange for a small percentage of what those risks would actually cost you.
However, the insurance industry in general is not very friendly towards innovation.
“The insurance market has been hardening since 2019, exacerbated by COVID,” Asaad said. “That issue is acute for startup segments… because the insurers that have been around for a long time are insuring a lot of these businesses which have had a long runway in history. It’s an industry that looks backwards and then makes decisions on the future.”
In another view, the insurance industry’s perceived resistance to insuring purpose-driven companies seems contradictory. Insurance is designed to mitigate uncertainty, and from that perspective, a better world is a predictable world.
However, nature is becoming increasingly unpredictable, in large part due to climate change. If a company’s work helps mitigate the effects of climate change and restore some of that predictability, it seems logical that the insurance industry would want to incentivize these companies to succeed.
Perplexingly, this does not appear to be the case.
“Unfortunately, when the capital markets and entrepreneurs are always looking into the future… but the insurance company can’t stop looking at the rearview mirror, you slow down that innovation,” said Asaad.
Challenges Around Securing Insurance Coverage
The insurance industry’s pervasiveness and challenging relationship with innovative companies has resulted in an environment that can make it difficult for businesses in the impact space to get off the ground.
“It’s become an unfortunate situation where businesses are unable to launch,” remarked Asaad. “They can’t secure contracts if they don’t have insurance.”
In cases where purpose-driven companies are able to secure insurance, pricing is often a hurdle, especially for start-ups.
“As a result of reduced interest in that space, there are insurance companies that have become opportunistic,” said Asaad. “They do charge a premium to insure these companies. Recognizing that they’re one of few that have an interest in underwriting these things, they can call their shots on pricing.”
One potential solution to the pricing problem is grants and subsidies for entrepreneurs. However, Asaad believes this only addresses part of the overarching issue.
“We are seeing an increased amount of this capital that’s being provided to the entrepreneurs, be that by the private sector or the government,” he said. “That does help to remedy the situation in the sense that it gives them the capital they need to secure insurance. However, it does not change the insurance segment’s vision or view on startup businesses and startup segments.”
Though these challenges are undoubtedly tough, they’re not insurmountable.
Critical Shifts in the Industry, and What Still Needs to Change
There is a growing sentiment in the insurance industry towards the opportunity purpose-driven companies represent.
“The competitive landscape right now, from an insurance perspective, is ready to be disrupted. What I’m seeing right now is a lot of younger people who see an opportunity within the industry to disrupt it, and have an entrepreneurial mindset, that want to insure and support the vision of these new segments where the journey is to make the world a better place,” noted Asaad.
Asaad compares these more entrepreneurial insurance companies to investment bankers. “They want to get to know: who are the people, the players, that have this idea? What’s their vision? What’s their aptitude, their experience?”
According to Asaad, one important change that still needs to be made across the insurance industry is a shift in mindset
“We have to take the mindset of supporting the entrepreneur and supporting the segments that are trying to make the world a better place. That is our duty.”
What Can Purpose-Driven Companies Do?
In emerging sectors, where there’s not a lot of data and history available, it’s difficult to quantify execution risk from an insurance perspective. That’s why it’s important to make as many unknowns as possible into “knowns.”
To turn unknowns into knowns for his clients, Asaad uses a method called the Insurance Investment Presentation. “We want the insurance companies to get comfortable investing their capital into these leaders and businesses,” he said.
“We want to start to recognize some of the operational pieces of the client or the business as it relates to insurance… When you get a sense of what the ecosystem looks like for their product or service, and how much control over it they have, you get a better sense of their ability to actually execute.”
Purpose-driven companies will also want to be particular when selecting an insurance broker to work with.
“Choose an insurance broker who demonstrates an interest in you and your business, an understanding of who you are, what your vision is, and who is fluent in the language of entrepreneurship, law, and finance,” Asaad recommends.
“They must exemplify the qualities of your business while packaging your story creatively in a manner which navigates the needs of underwriters in today’s market.”
Finally, purpose-driven companies should feel empowered to speak up about the challenges their companies are facing when it comes to insurance, and encourage others in the sector to share their stories as well.
If entrepreneurs advocate for focus on innovation in the insurance industry, meaningful change is possible, and with it, a chance to build a better world.
