Report on Disruptive Low Carbon Innovation for ENGT5219 Module

This report provides a comprehensive analysis of disruptive low carbon innovation, focusing on its implications for the insurance sector in the face of climate change. It begins by outlining the threats posed by global warming, such as rising sea levels and increased extreme weather events, and how these impact insurers who manage both liability and property risks. The report then defines and differentiates between disruptive, incremental, and game-changing innovations, illustrating each with relevant examples. The core of the report presents a business case for low carbon innovation, specifically highlighting the role of carbon trading as a disruptive strategy. It explores how the insurance sector can adapt to climate change by investing in new technologies and infrastructures. The report also examines the challenges associated with carbon trading, such as ethical and equity considerations, and the difficulties in accurately measuring emissions. The conclusion emphasizes the need for innovative solutions to address climate change and underscores the importance of carbon trading as a key strategy for the insurance industry.

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Disruptive Low Carbon Innovation
Student’s Name
Institutional Affiliation
Date

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Introduction
Currently, innovation performance is recognized globally as a critical determinant of
the level of a nation’s economic growth. It is also recognized as a means of addressing
common challenges affecting humanity including public health, climate change and
sustainability issues . Innovation is necessary for the full achievement of the Sustainable
Development Goals. Successful innovation is dependent on factors such as a skilled
workforce and access to finance [1]. The insurance sector is one of the businesses that are
likely to be significantly affected by climate change. Global warming is projected to cause
rising sea levels and increased risk of flooding in low-lying areas coupled with property
destruction. This report outlines the threats of global warming, corresponding innovation
aspect of the climatic change and a business case for this case.
Threats
Since insurers assume both liability and property, they are always seeking to mitigate
potential losses through the risk management process. Regardless of what may be the cause
for climate change, the unprecedented and potential losses have made insurers undertake
precautionary measures. According to [2], insurers have redoubled their efforts on the
property side in a bid to raise awareness of extreme weather conditions. They are pointing out
ways of limiting potential damage through practices such as better planning, stronger
building procedure, and more prudent land use patterns. [2] argues that global warming has
the capacity to affect many sectors of the insurance business including life insurance,
specifically if the increase in temperatures increases death rates. All kinds of property losses
are more likely to be experienced if the severity and frequency of extreme weather conditions
rise. In addition, higher losses due to commercial liability are anticipated if consumers and
shareholders consider businesses responsible for the worsening climatic conditions [3]. On
the liability side, insurers have undertaken to help their clients understand and focus on risk
management associated with climate change including refraining from harming the
environment. Failing to disclose or protect against such harm poses a risk of lawsuits.
According to [3], the insurance industry is conducting studies on the impacts of
climate change on the business. The Geneva Association is made up of members representing
the largest insurers in the world. The association carries out studies aimed at constructing
resilience to adverse weather conditions as well as methods of transitioning to a low-carbon
economy.
Disruptive innovation
Coined by Christensen, disruptive innovation can be defined as a process by which a
service or a product initially takes root in simple applications and gradually moves upmarket
displacing established competitors [4]. The new product or service displaces the existing ones
as well as affecting market-leading firms. Disruptive innovation is based on the identification
of new potential demands and the subsequent creation of new services or products
establishing a new market. According to [5], an example of disruptive innovation was the
introduction of cell phones in the 1990s which provided a limited access to consumers. The
advantage of exploiting new innovations and ideas is the creation of a new market and has the
potential to be the breakthrough for companies looking to expand their operations [4].

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According to [5] disruptive innovations are possible since they usually begin in two types of
markets overlooked by incumbents. These markets include low-end footholds and new-
market footholds. In the latter approach, the disruption creates a market where none existed
before. The disrupter simply comes up with a method to turn nonconsumers into consumers.
The first approach becomes successful since incumbents focus more on providing for their
most profitable customers, paying less attention to low-end customers.
Incremental innovation
According to [6], incremental innovation can be defined as the process of exploring
radical products to improve their performance. It can also be defined as a sequence of small
changes or improvements made to an existing product, process or service. The changes done
on the product may be directed on improving its efficiency, productivity or competitiveness.
This type of innovation is commonly applied by enterprises to help improve or maintain a
product’s position in the market. A range of important benefits are associated with
incremental innovation. For example, it can lead to improved performance under specific
conditions and increased cost-efficiency. It can also result in significant price reductions and
functional improvements such as enhanced reliability, increased user friendliness and
marginal additions to applications [7]. For example, [8] argue that incremental innovation can
increase value for both patients and physicians in the pharmaceutical sector. According to [8],
incremental innovation is crucial in advanced economies where there is intense competition.
In developing economies still in their efforts to catch up, incremental innovation may be of
higher value. Incremental innovation makes an existing innovation more attractive and
suitable in the context it was originally introduced. This increases the likelihood of the
innovation being adopted in other environments or applications.
Game changing innovation
Game changing innovation can be defined as new technologies business models or
processes that are a considerable variation of the main stream tools. These mainstream
methods of practice and processes have dominated the industry for a long time. Some of the
most important characteristics of game changing innovations include the ability to fulfill a
crucial unmet objective or wish that customers had. Another characteristic of these
innovations is that they usually define a new category. According to [9], some of the highly
successful organizations and companies across the globe attribute their growth to game
changing innovations. These include Google's Search Engine and Apple's iPod. These were
crucial innovations that produced fundamental shifts in business practice redefining markets
and the companies' core business. It is useful to consider the possibility of game changing
innovations in strategic planning. With the advancement of technology and increased use of
computer modeling, tools such as Computer Aided Design (CAD) provide a good foundation
to start the exploration of game changing innovations. According to [10], the ability to
immerse oneself into the design environment and to perform cost, time and sustainability
analysis of entire projects forms a game changing innovation. Other technologies that can
produce game changing innovations include virtual reality and 3D printing.

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Business case
According to [11], the insurance sector is one of the hardest-hit businesses by climate
change and is in the frontline in the battle against climate change. It is often forced to pay out
more to policyholders as adverse weather conditions including droughts, floods, heat waves,
and storms rise in frequency and become more severe. In addition, considering that insurers
are one of the world’s biggest investors, they face considerable losses as climate change also
has an impact on the companies and organizations they invest in. Financial losses related to
climate change, liability risks, health, technological and regulatory impacts have serious
implications on the operations of the business including financial reserving of these
companies [3]. A key function of insurance companies is to price risk so that they can be
aware of how high they should charge in premiums as insurance to their customers.
Consequently, they have to devote significant resources in the assessment of the various risks
so that they can have a clear idea about the financial implications of climate change.
Climate change is likely to challenge the current and preexisting ways for the
regulation of the investment practices of insurers. The decision to lower climate change
effects will most likely yield revolutionary investment opportunities. These investment
chances are available as novel economic sectors emerge and become prominent in the
provision of goods and services aimed to lower greenhouse gas emissions [2]. The shift from
the existing system of energy utilization and other practices that produce copious amounts of
greenhouse gases such as carbon dioxide requires changes to the existing energy generation
and distribution forms and methods. The development of new technologies to make energy
production from clean sources and its utilization more efficient requires innovation, capital,
and new infrastructure. Being able to invest in these infrastructures could be an attractive
opportunity for insurers.
A key innovation that has the potential to lower greenhouse gas emissions thus
lowering the impacts of climate change is carbon trading in the insurance industry. According
to [12], carbon trading is a new channel for insurance investments in the coming years.
Carbon trading is a process that involves the buying and selling of credits and permits to emit
carbon dioxide. Insurance companies can also spot an opportunity in the innovation of
products that will be necessary during the event of catastrophic events linked to climate
change and also devices to help people survive these events. [2], notes that traditional
products offered by insurance investors such as property insurance of renewable energy
projects will also play a crucial role in addition to the specialized niche for new innovations.
Carbon trading creates new financial incentives to motivate individuals and companies to
lower their carbon footprint. One scheme of carbon trading requires industries or businesses
whose greenhouse emissions exceed a certain level to or operate in a certain sector such as
transport or fossil-fuel-based power plants to obtain credit or an allowance for each tonne of
CO2 they emit per annum. The businesses participating in this scheme may receive initial
allocations of carbon credits without any charges. If a business manages to reduce its
emissions, it can sell its extra carbon credits to other businesses that have raised their
emissions thus creating a market [13].
The other scheme involves the production of carbon offsets that can be purchased by
any individual, business or organization to lower their own emissions voluntarily. According
to [13], a small but rising number of insurance businesses plan to join the market for carbon

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trading through the provision of mechanisms that help their clients better manage carbon risk.
A recent rise in activities involving the bundling of carbon offsets with insurance products
especially in the travel and automobile industry. In addition, insurance businesses have
increased their participation in the provision of liability and property insurance for companies
conducting carbon reduction capital projects. The consultative services in the design and
management of such projects are also included. According to [14], those investing in the
rapidly growing market for carbon credits can be provided with insurance for protection
against political uncertainty which has stagnated emissions trading in regions such as Europe.
Insurance companies in European countries plan to be involved in carbon trading through the
provision of incentives for other businesses and industries to push them to adopt
environmentally friendly practices in the insurance terms.
However, just like other policies and models that are aimed at reducing climate
change by lowering greenhouse gas emissions, carbon trading faces issues related to ethics
and equity. The calculation of the costs and benefits related to a particular policy or market
requires sound judgments about the level of future impact on the climate [12]. A problem
with carbon trading is the challenge in the measurement of the actual emissions of businesses.
Besides, climate change is a global problem hence the scheme would be ineffective if
introduced in certain parts of the globe. This leads to the free-riding phenomenon where
producers and businesses shift to areas or countries without the policy.
Conclusions
The issue of global climate change is a complicated one and many issues remain
unsolved. There is general agreement that climate change poses a great danger to humanity
due to the increased unpredictability of weather conditions. Several policies involving nations
across the world have been established aiming to curb climate change by lowering
greenhouse gas emissions. However, it has been noted that revolutionary and innovative ideas
are necessary to actually handle climate change. Innovative ideas are needed in the design
and production of new products and services that challenge the current methods. Insurance
companies have presented carbon trading in its various forms as a disruptive innovative idea
that has the potential to lower greenhouse gas emissions through its application. This is
necessary because climate change has serious impacts on insurance business. Consequently,
many insurance companies have undertaken measures to reduce their own emissions and to
provide incentives to their clients to follow their footsteps. Through carbon trading, insurance
businesses will be able to make a contribution to environmental conservation and reduce
future risks to their operations.

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