Sustainability for insurance companies - EU regulations

Current climate models underline the urgent need to do something about climate change. “Climate change” is now often referred to as “climate catastrophe.” Sustainability is also becoming an essential topic for the insurance industry. In fact, according to Versicherungsforen Leipzig GmbH, the insurance industry plays a decisive role in the struggle for more sustainable economic activity.

The European Green Deal

The goal is clear: the EU seeks to achieve climate neutrality by way of increased sustainability. And while the costs of the Green Deal remain unclear, its effects are already being felt in the insurance and financial industries as the EU has passed a series of laws and regulations relating to sustainability. Additional legislation is currently in preparation or in the voting stage.

One of the best-known regulatory changes is the Transparency Directive (also known as the Reporting Directive), which requires financial market participants and financial advisors to publicly disclose how they deal with the issue of sustainability. Insurance companies (and their intermediaries) fall within these categories and are therefore directly affected by the Directive.

For its definition of “sustainability,” the EU incorporates more than just damage to the environment. Instead, ESG (environmental, social, and governance) criteria are used.

Since the beginning of last year, the organization of private insurance companies in Germany GDV has required that its member companies adopt the goals of the Paris Agreement and the “Sustainable Development Goals” of the United Nations. By 2025, insurance companies in Germany hope to achieve climate neutrality in their business processes by using energy more efficiently, reducing CO2 emissions, and offsetting their remaining emissions.

Insurance companies can be drivers of sustainable business

Banks and insurance companies are in the perfect position to help make the economy more sustainable. After all, responsible investments will be the basis for achieving sustainability goals. As some of the largest institutional investors, insurance companies can play a key role in reaching these goals.

Sustainability not only affects their own investment strategies, but also the products they offer their customers. Investing in sustainability funds is one way to increase sustainability. On the product side, it can include the offering of variable annuity plans (for example). Sustainability also includes divestment, or doing away with non-sustainable forms of investment. This might involve no longer investing in companies that generate fossil fuels.

Insurance companies can also move towards greater sustainability in their business by modifying their risk acceptance criteria and thereby rejecting certain risks. This might involve no longer working with industries that have been shown to have a particularly negative impact on the environment.

It will become increasingly difficult for the insurance industry to settle damages that occur as a result of climate change. After all, climate change increases the likelihood of extreme weather events. Severe storms cause damage to homes, thereby affecting homeowners insurance. But with the right mindset, even such a traditional product can be made sustainable. German insurers The Bayerische and Domcura have recently teamed up to launch “green” building insurance which, among other things, rewards damage repairs done with sustainable materials and offsets the CO2 released during fires.

As a society, we have a long way to go until sustainability is considered with the urgency that it requires. Insurance companies have millions of contacts and numerous touchpoints with customers. As part of their corporate responsibility, they could use this reach to offer practical tips and advice on how to behave more consciously in everyday life. For example, companies with apps could incorporate calculators that allow users to determine their carbon footprints. Banks, credit card companies, and Fintechs are already making use of such calculators and modules, which ultimately lead to the more responsible use of resources.

Sustainability within companies

Sustainability in the insurance industry is not just about responsible investments and the development of new products. To meet ESG goals, it also requires a change in corporate culture. Companies can promote sustainability in a targeted manner during employee development and awareness programs.

A company that sees itself as sustainable is more likely to commit to the equal treatment and opportunity of its employees. Sustainability must be considered during the day-to-day operations of companies. It encompasses nearly everything, from the purchase of office supplies and furnishings to the (further) digitization of processes and the printing of paper receipts. For insurance companies, the path to a sustainable business is long and not always easy.

One thing is clear: companies will not only be faced with more work, but also with new requirements. This also applies to management and reporting. Over time, however, their efforts will pay off for everyone.

We’ve been concerned with sustainability in the insurance industry for some time now. Feel free to check out our article on sustainability from last year. You can also learn more about sustainability at the adesso Group in our Sustainability Report.