A long way to go: Sustainability and Insurance Companies

Sustainability is a topic of global significance and is also becoming increasingly important in the insurance industry. This is because insurance companies normally make long-term commitments and therefore also have to think long-term.

In insurance, sustainability encompasses a wide range of aspects aimed at ensuring the company's long-term success while also acting in a socially and environmentally responsible manner. Some of the most important aspects of sustainability within the insurance company are explained below:

Sustainability as a risk factor

Within the insurance company, sustainability can be seen as both a risk factor and an opportunity. As a risk factor, sustainability can mean an increase in insurance claims due to climate-related damage or changes in a company's business model. One example is environmental damage caused by natural disasters, such as floods, forest fires or storms. If an insurance policy has not been adequately calculated for losses of this type, high loss amounts can quickly jeopardize the insurance company's financial stability.

The long-term effects of climate change and pollution can also pose risks for the insurance industry. Rising temperatures and more frequent extreme weather events can lead to an increase in loss frequency and intensity. This poses a challenge for insurance companies, as they must ensure sufficient risk assessment and claims coverage.

In addition, sustainability can also be important for an insurance company's reputation and image. If a company invests in polluting industries or engages in unethical business practices, it can lead to a loss of customer trust and an increased risk of customer churn.
On the other hand, sustainability can also be seen as an opportunity. Insurance companies can integrate sustainability into their business model and offer innovative, environmentally friendly products and services that meet customer demand for green insurance solutions. This can lead to a competitive advantage and improve the insurance company's brand image.

Sustainability as a business opportunity

More and more customers are mindful of sustainable aspects when choosing their insurance products and expect insurers to behave in a more environmentally friendly and socially responsible manner. Insurance companies that respond to this demand and offer appropriate products and services have the chance to distinguish themselves from other insurers and strengthen customer loyalty.

One way for insurance companies to leverage sustainability as a business opportunity is to develop green insurance products. For example, insurance policies are being offered for sustainable buildings that use environmentally friendly technologies such as solar panels, energy-saving heating systems, and rainwater collection systems. These kinds of insurance policies are more attractive because they help customers reduce their environmental footprint and save money.

Another area where sustainability presents a business opportunity for insurance companies is in promoting environmentally friendly behaviors among customers. Among other things, some companies offer insurance rates that are tailored to the customer's individual driving style (for example, determining them based on speed and anticipatory driving). Customers who drive in an environmentally conscious manner receive a discount on their insurance premium. This creates an incentive for environmentally conscious behavior and allows the insurance company to benefit from a reduced loss ratio.

In addition, insurance companies can also invest in sustainable projects that benefit their business. For example, they can invest in renewable energy or energy efficiency products to make their own business more sustainable, while also benefiting from opportunities in this area.

Sustainability as part of the corporate strategy 

Sustainability is an important aspect of insurance companies' corporate strategies. It helps to ensure the insurance company's long-term success, improve risk management and strengthen the company's image. A first step in integrating sustainability into the corporate strategy is to set clear sustainability targets and indicators that enable the company to measure and track its progress. The company should also ensure that sustainability is considered in all business areas and activities, including product development, risk management and investment decisions.

Another important aspect of integrating sustainability into corporate strategy is creating a culture change in which sustainability is seen as the basis for all business decisions and activities. This includes training employees in order to ensure that they have the knowledge and skills to make sustainable decisions and achieve the company's sustainability goals.
A sustainable business strategy can also help strengthen the relationship between insurance companies and their customers, as customers are increasingly valuing sustainable action and social responsibility.

Insurance companies should invest in sustainable projects and companies. For both financial and social gain, they can use their capital to invest in renewable energy, environmentally friendly technologies and social projects.

Finally, companies should also be mindful of transparent and responsible business practices and adhere to internationally recognized sustainability standards. This includes disclosing their sustainability performance and reporting.

Sustainability as a regulatory requirement

Sustainability is increasingly being regarded as a regulatory requirement in the insurance industry as regulators around the world tighten their requirements for companies. This is in order to ensure that they are assuming a leadership role in addressing environmental and social risks. An important role that regulators have is ensuring that insurance companies adopt sustainable business practices and have risk management systems in place for identifying and managing environmental and social risks. This can help reduce the risk of damage from pollution and climate change and promote the financial stability of the insurance industry as a whole.

For example, in 2019 the European Union adopted a regulation on sustainability risk disclosure for financial services providers. This applies to insurance companies as well.
The regulation stipulates that insurance companies must inform their customers about sustainability risks arising from environmental, social and governance factors. They must also disclose their own sustainability strategy and practices in order to ensure transparency and comparability between companies. Furthermore, the regulation requires that insurance companies consider sustainability factors when investing in companies and projects, and ensure that they do not finance activities that go against sustainability goals.

In 2020, the European Union adopted the Taxonomy Regulation. The aim of this regulation is to establish uniform criteria to be applied when classifying economic activities and investments in terms of their impact on the environment and climate. The regulation establishes six environmental goals that economic activities and investments should support:

1. climate change mitigation
2. climate change adaptation
3. sustainable use and protection of water and marine resources
4. transition to a circular economy
5. pollution prevention and control, and protection
6. restoration of biodiversity and ecosystems.
   

In summary, sustainability in the insurance industry can be seen as both a risk factor and an opportunity. By integrating sustainability into their business model and corporate strategy, insurance companies can ensure long-term success, better manage their risks and strengthen their brand image.

The German BaFin conducted a cross-business survey on sustainable finance and summarized the results in its report "Sustainability in the German Insurance Industry". This survey has shown that: "The insurance sector is on the right path, but it's a long one."

You can find out here how the adesso Group incorporates sustainability into its everyday business.

Would you like to talk to us about software and sustainably modernizing your IT?

Then feel free to get in touch with Karsten Schmitt, head of business development.