As of August 2, 2022, according to the IDD, insurance intermediaries must determine the sustainability preferences of their clients when advising them and take them into account when recommending products. As a result, the topic of sustainability has now also been established in regulatory terms in insurance consultancy and is expected to play a greater role in product and supplier selection.
However, the IDD only refers to insurance-based investment products and is therefore focused on life insurance. In this sense, in recent months and years there have been a large number of new products in the life insurance market oriented towards sustainability. Meanwhile, a strong focus on equity investments has emerged within assets and collateral funds.
Regulatory requirements such as the Transparency and Taxonomy Ordinance as well as a host of fund seals help brokers and end-clients with classification. Meanwhile, also in the area of property insurance, there are developments towards sustainable products. However, compared to life insurance, the approaches are very heterogeneous. This makes the sustainability aspects of property insurance a colorful but very interesting complex of topics.
Sustainable technologies and lifestyles insurance
An important aspect is the question of what is actually insured. In this way, property insurance products can have a lasting effect if, for example, technologies that enable the transformation towards a sustainable economy are insured.
This includes, in particular, renewable energy generation systems, such as photovoltaic, wind or geothermal systems. An exciting field for agricultural risk insurers is the protection of agricultural photovoltaic systems. Solar cells are erected over cultivated fields.
In this way, on the one hand, large agricultural areas are used to generate regenerative energy, and on the other hand, solar panels provide shade and protection for plants against hail. In addition, private property insurance products can protect against the risks of a sustainable lifestyle. These include, for example, e-car and bicycle insurance, but also coinsurance for volunteer work in private liability insurance.
Another perspective foregrounds insured risks and assesses protection against weather risks as a sustainable contribution. This perspective can also be found in the EU Taxonomy, the European classification system for sustainable economic activities.
There, the coverage of climatic risks such as droughts, storms/storms or floods is expressly emphasized, which means that insurance against natural risks in particular can make a significant contribution to adaptation to climate change. Issues of insurability and market penetration will be decisive for the scope of this contribution in the future.
Damage prevention measures
The most lasting damage is the one that doesn’t occur in the first place. A damage event within property insurance generally means that resources are consumed and the environment is affected by the damage event or compensation. In addition to the ecological effects, there are often social consequences for those affected.
Therefore, it is not only beneficial for the insurer’s combined ratio, but also positive from a sustainability point of view if damage prevention measures are taken. Insurance companies can integrate them into their rates and incentivize policyholders to avoid damage.
Simple measures are, for example, reimbursement or a financial reward for advice on theft protection in home insurance or driver safety training in car insurance. Likewise, the insurer can motivate measures for the maintenance and repair of buildings.
Smart home technologies and artificial intelligence are also opening up new possibilities. For example, smart water stop systems can help reduce the extent of water damage in the event of a burst water main. Sensors can be installed in business interruption insurance, on the basis of which the failure of machines can be more accurately predicted.
Sustainable care modules in the event of an accident
In addition to loss prevention, property/casualty insurers can have by far the greatest impact in claims settlement when it comes to sustainability. According to the General Association of the German Insurance Industry (GDV), German property and casualty insurers alone paid benefits totaling 62.3 billion euros in 2021.
Although this value is distorted by the extreme weather event Bernd, when looking at the more than 50 billion euros in profits and more than 20 million claims that were registered in both 2019 and 2020, the immense leverage of the industry is evident. For this reason, a growing activity of insurers is also observed in this area.
A now common approach is additional services for long-term compensation, for example in home insurance. The policyholder receives greater benefits if the newly purchased items come from fair trade or, in the case of household appliances, have the highest energy efficiency class.
Within homeowners insurance, some insurers will cover the cost of an energy consultation to promote an energy efficient restoration of the building. Some homes also assume the costs of energy rehabilitation of the building.
In principle, there is great ecological potential when damaged objects are not replaced but repaired. A well-known example is the windshield, which does not have to be completely replaced after a stone hit. According to the automotive glass specialist Carglass, 90 percent of CO2 emissions can be saved in case of repair.
In the meantime, service providers have established themselves on the market who specialize in the acquisition of used original car parts and have established a network throughout Europe for this purpose. This underlines the important role of cooperation partners such as workshops and claims service providers.
Service providers and attendants are also of particular importance in the context of the already mentioned damage prevention measures, for example in the provision of smart technologies such as sensors and water stop systems.
Insurers can make their product landscape more sustainable by using ecological and social criteria when selecting their service providers. Another means of sustainable claims settlement is compensation for CO2 emissions caused by damage, for example in the case of fire damage.
Promotion of sustainable behaviors or sustainable projects
In addition to the aspects described so far, there are a number of measures on the market that can encourage policyholders to behave more sustainably. These include discounts for electric cars that cannot be justified in terms of risk theory and are intended to promote this technology. In this way, insurers are driving green change while also benefiting from a growing wealth of data and experience in a potentially important market segment. This also includes telematics offers that encourage policyholders to drive more safely and therefore more economically.
In addition, some characteristics of the conventional rate can also be assigned to this category. Even if the introduction of this rate feature was originally due to lower loss expectation and not to promote traffic turnover, the Bahncard discount within car insurance certainly counts, which may motivate policyholders to use the train more often. Another example of car insurance is the compulsory or voluntary compensation of the CO2 emissions emitted by the vehicle.
In this way, policyholders are aware of their vehicle’s emissions and, if necessary, motivated to consider this aspect more closely when purchasing a vehicle in the future.
Last but not least, when it comes to sustainable insurance products, it is now almost de rigueur that the conclusion of the contract is linked to a small donation for ecological or social projects. As a rule, a tree is planted on contract or a small amount of money is donated to a climate protection project. The effect of such a donation is comparatively small, which is why such campaigns are often criticized as a pure marketing tool.
True to the motto “every euro helps”, these concepts have a right to exist, but should not be considered as a core feature of a sustainable property insurance product. Now there are a number of other more important aspects, as the following comparison shows.
Consideration of the entire production process.
However, if you want to advise your clients on a sustainable property insurance product, you should always look beyond the finished product. As with sustainable furniture or other tangible goods, the production process also plays an important role with insurance products.
An important factor here is the capital investment of the premiums received. Does the insurer take into account in its investment policy the exclusion criteria of controversial sectors and business practices, such as coal-fired power generation, controversial weapons production or human rights violations?
Do you not only strive for financial but also ecological and social objectives in your capital investment and direct your investments accordingly in projects that have a positive impact on the environment and society?
According to GDV, the capital investment portfolio of German property and casualty insurers amounted to around 182 billion euros in 2020. This money can have a big impact, both positive and negative.
Another aspect is the ecological footprint of the insurer in your location. Are you already climate neutral and your energy comes mainly from renewable sources? Is the company largely paperless? Even if the ecological impact of an insurer on its business processes is limited compared to a manufacturing company, large savings are possible, especially in the areas of building heating, business travel and also in procurement processes.
Social issues also play a role, such as dealing with our own employees, supporting social projects or respecting human and labor rights in the purchasing process. Aspects such as sustainability or the insurer’s climate strategy and the management of sustainability risks can be assigned to the governance dimension. In general, considering a sustainable property insurance product is inextricably linked to an analysis of the underlying company.
Both the insurance companies themselves and the product landscape will likely move further towards sustainability in the future. If regulatory requirements were to focus more on property insurance products, developments could receive an additional boost.
The author Oliver Bentz is a Senior Analyst and Head of Sustainability at Assekurata Assekuranz-Rating-Agentur GmbH, Cologne.