The scientifically proven change in our climate polarises society. This is already evident in the description of the phenomenon: the terms climate disaster and climate change refer to the same global processes – but from very different stances. It is a topic that moves people and one that the insurance industry cannot ignore.
The growing interest of consumers in the topic of sustainability is already palpable, especially in the retail and consumer goods industries. Consumers are more concerned with the origin of products, the conditions of production, the raw materials used and the disposal of goods. Demographic change, climate change manifesting itself through extreme weather conditions and the global shortage of resources are forcing their way into the consciousness of consumers. Sooner rather than later, aspects of sustainability will also reach the financial and insurance industries and raise issues.
Direct effects on the business model
Climate change will have a direct impact on the business of insurers and reinsurers. For example, the investment bank Schroders concludes in its "Climate Tracker" that global warming of 3 degrees Celsius would mean that most parts of the world will no longer even be insurable. This alone should be a serious argument for the insurance industry to actively participate in achieving climate objectives.
The EU's path to sustainable financial products
As traditionally one of the largest institutional investors, the insurance industry is affected by global changes from a different angle: climate change is altering the direction of the economy and social efforts towards sustainability worldwide. In March 2018, the EU Commission launched a whole series of initiatives aimed at anchoring the issue of sustainability in the financial world. In the future, ESG criteria (ESG: Environmental, Social and Governance) are to relate equally to suppliers and products. These aspects will therefore be incorporated into MiFiD II (MiFiD: Markets in Financial Instruments Directive, IDD 2016/97 (Insurance Distribution Directive) and Solvency II (European solvency requirements for insurers).objectives.
One of the first measures agreed by the European Parliament, the Council and the European Commission is the transparency directive. The disclosure requirement introduced therein is intended to ensure that customers and other stakeholders are provided with sufficient information on the consideration of sustainability aspects.
Some key requirements for insurers can be derived directly from the transparency directive.
- For example, companies and intermediaries must provide information on their websites about the integration of sustainability risks in advisory processes and investment decisions.
- Pre-contractual information and advice must include information on how sustainability risks are integrated into the advisory process and what effects the risks may have on the viability of a product.
- Large companies with more than 500 employees must provide a public statement that provides information about their strategies regarding sustainability in investment decisions.
- Intermediaries and companies must disclose how their remuneration policies are compatible with the integration of sustainability risks.
There are additional information requirements for financial products that are marketed as sustainable. This is to ensure that the client's ESG preferences are documented during the initial assessment and the advisory process.
Strategic action is required
There is still no complete picture of all regulations and effects that the new EU directives for sustainable finance will have on the insurance industry. However, out of self-interest and against the background of an impending climate disaster, society cannot afford to carry on with a "business as usual" attitude. Action needs to be taken now, not only to examine the operational implications for compliance, but also to work strategically on the issue of sustainability and risks – because customers will ask for it anyway, as in other industries.
It is therefore important that insurers invest in a sustainable manner and support and promote sustainable behaviour on the part of their clients.