Should the price for an auto insurance policy differ if the vehicle is a conventional gas or diesel engine versus an electric car? What about insurance investor fund allocation – how should companies determine the proportion of green investments within a portfolio? These are just two of the many questions insurers are facing as they grapple with a global shift towards more sustainable business models.
Whether it’s from consumer activism, tighter government regulations, or the need for improved operational resiliency in the face of climate change, companies are taking major strides towards sustainable business models. As EY reports, incorporating sustainability into core business strategies is about more than “doing good” – it’s a smart business strategy. Capital markets are evaluating performance against environmental, social, and governance (ESG) criteria in investment decisions. Companies that fail to consider ESG criteria are at a disadvantage. In fact, 90% of global investors will revise their investments if companies do not consider ESG criteria within their business model.
Sustainability Trends in the Insurance Industry
The United Nations Environment Programme Finance Initiative (UNEP FI) has been launched as a partnership between UNEP and the global financial sector to mobilize private sector finance for sustainable development. UNEP FI works with more than 450 banks, insurers, and investors and over 100 supporting institutions to help create a financial sector that serves people and the planet while delivering positive impacts.
Regulators are also requiring sustainability reporting from insurers, and they expect financial flows will be adjusted towards ESG criteria, in accordance with the 2015 Paris Climate Conference. The EU Taxonomy Regulation will require most European financial institutions to outline the environmental sustainability of their economic activities. But the shift towards sustainability is not just about ESG criteria, although that’s certainly an important factor. Risks associated with climate change, such as more extreme weather, are also top of mind for insurers.
Global natural disaster insured losses, the amount insurers are forecast to pay out, is estimated to be as high as US$42 billion for the first half of 2021, according to a report from the insurer Aon. From the Texas polar vortex to the Canadian heat wave to the extreme flooding in Germany, extreme weather events are costing insurers more than ever – and these climate-related risks are only expected to increase. More than half of U.S. regulators indicate that climate change is likely to have a “high impact or an extremely high impact” on coverage availability and underwriting assumptions, according to the “Insurance Regulator State of Climate Risks Survey” conducted by the Deloitte Center for Financial Services.
Gone are the days when sustainability was a footnote on an insurance company’s annual report. Today, stakeholders are pushing for change and demanding accountability. Customer preference is driving a shift towards more sustainable products and services. A variety of carrier options in a competitive marketplace means that customers are comfortable walking away from companies that don’t follow sustainable practices. Millennials and Gen Z are the most likely to make purchasing decisions based on values and principles. This is the same group insurers are competing to earn loyalty from to build long-term customer relationships.
The same goes for hiring top talent. In a tight talent market, professionals can afford to be selective about where they work and increasingly opt for companies that align with their values. Improving ESG performance is key to attracting and retaining Millennial and Gen Z employees.
Linking Sustainability with Business Activity for Environmental, Social, and Economic Impact
Enterprise solutions from SAP deliver company-wide functionality and industry-specific features designed to help businesses achieve sustainability at scale. These solutions include:
- Climate change solutions: Lower a business’s environmental impact by minimizing the carbon footprint associated with products and operations.
- Sustainability and ESG reporting solutions: Connect environmental, social, and financial data holistically to steer businesses toward smarter decision-making.
- Circular economy solutions: Move to circular processes across a business’s entire supply and value chain.
- Social responsibility solutions: Enable equality and social equity across a business’s entire workforce and network.
Toni Tomic is global head of Insurance at SAP.