In response to the widespread demand for more attention to be paid to the ESG agenda, many German insurers have set themselves ambitious targets. However, executives often lack a clear roadmap for navigating the various challenges of implementing the agenda. With the help of a structured and holistic approach, insurers can measure, manage and improve their ESG performance, and in this way fulfill their special responsibility to help society and businesses build safer communities and minimize environmental impact.
The issue of sustainability has irreversibly embedded itself within the fabric of both the economy and society. Inevitably, we are seeing this impact in the insurance industry. An increasing number of sustainable products are being designed to satisfy the customer expectations revealed in various market surveys. The future for any insurers who ignore or downplay the importance of sustainability appears bleak.
The GDV, the German Insurance Association, has led the way by making commitments to reduce emissions, bolster diversity in senior management positions within the industry, and integrate the principle of sustainability within its own governance structures and its members’ insurance portfolios.
Indeed, Strategy& anticipates substantial developments in the insurance industry as the ESG agenda spreads further and deeper into every aspect of the insurance business.
The European Insurance Distribution Directive (IDD), in combination with national implementation laws, will oblige insurers to offer sustainable life insurances from August 2022 onwards. If the customer demands sustainable products, the insurer or brokers cannot offer non-sustainable products. Therefore, insurers need to adjust their product portfolio and offer sustainable life insurance products that embrace ESG as soon as possible.
The financial regulator is closely monitoring the offerings and services of insurance companies. If greenwashing is suspected, the supervisory authority will intervene. Furthermore, civil society, NGOs and the media will actively question offerings and uncover potential abuses. As a result, insurers must acquire a swift and sustained understanding of their investments and partners.
Given the overall trend towards greater sustainability in insurance products (starting with life insurance), broker and online comparison (broker) portals are preparing to implement ESG-based tick boxes. Non-sustainable products that fail to meet the requirements will be excluded from the offering if the client activates the tick box. Sustainable products will therefore be a key prerequisite for maintaining access to customers via those portals.
Private and business investors are investing heavily and increasingly into sustainable assets. Current and upcoming government investment packages will reinforce this development. Insurers are contributing through their extensive investment volume. Individual impact investment goals will also be helpful as a USP for insurers.
Society expects the whole value chain to be taken into consideration when ESG performance is analyzed and improved. The entire economic ecosystem of a company will be scrutinized, and partners that do not meet the required standards will be pointed out. For insurers, this means that bad apples in their ecosystem have a negative impact on their own reputation.
FinTechs have already shaken up the financial services market. Processing big data is part of their business identity. This capability can be transferred to the measurement and management of sustainability. FinTechs can use this advantage to secure timely and holistic insights of their own processes and those of their partners. They will therefore be able to promote and adjust offers more quickly. Sustainable FinTechs must not be ignored either, despite being still very small, as they are growing fast. FinTech advantages can be harnessed through strategic partnerships.
Net zero must not be misused as a cover for missing real reductions. The availability of compensation certificates is limited, and prices will jump rapidly from 2035 onwards if these real reductions are not achieved. When it comes to compensation rights and certificates, insurers are in direct competition not only with their own industry but with the entire economy. Insurers must realize real reductions as they cannot rely on compensation alternatives.
The progress of individual insurers, however, has stalled somewhat this year after making significant commitments in 2021. International conflict and economic disruption have certainly diverted management attention in general. Furthermore, longer-term structural challenges, not least the complex practical task of building a comprehensive measurement system for sustainability, also hold companies back. Indeed, in one of our studies, three out of four companies say they are still at the beginning of their ESG transformation.
We believe that insurers, given their important social role as protectors and risk advisers, have an obligation to up their game and set an example that reverberates across the industry spectrum. They need to act on each of the three aspects of the ESG agenda – environmental, social and governance.
In respect of the environment, emissions are divided into three categories. Scope 1 and 2 emissions certainly need to be addressed urgently and can actually be reduced relatively quickly. Scope 3, however, is by far the most significant category for the industry. Insurers have committed to a comprehensive reduction of Scope 3 emissions, but this will be a long process that will require necessitate substantial time and effort. Its practical implementation should no longer be postponed.
Insurers have made fewer concrete commitments to social sustainability. Strategy& believes that companies’ social responsibility goes well beyond its duties as an employer, and that this is especially true for insurers as social responsibility is a key identifier of their business model.
Although insurers have made steps to reform their governance structures as part of their ESG strategy, we still believe that a shift in mindset is necessary. Insurers should view the move towards improved governance as an opportunity to implement comprehensive organizational change, rather than just as a reactive response to externally imposed regulation.
There is certainly much to work on, and without a focused structure, companies can find the overall task intimidating and bewildering. Strategy& has therefore developed a framework to help insurers to measure, manage and thus improve their ESG performance. There are four dimensions to this framework. Each of these dimensions can then be divided into various undertakings to address the three ESG pillars.
Insurers need to elaborate all four perspectives to improve their ESG performance in all dimensions.
Asset management is a major lever for insurers to bolster sustainability through third parties and meet the demands of customers. Integrating ESG performance as an additional interest rate equivalence into investment accounting (including observing emission reductions) can help to improve the role of asset management.
Insurers need to consider how and which clients, objects and risks should be insured, as the ESG performance of these clients will affect the insurer. They should consider the lack of environmental and social sustainability as an additional risk with an associated adjustment of the risk premium (including for PDP), and amend their underwriting and pricing guidelines accordingly.
The insurance operation offers massive potential to achieve environmental and social improvement. Insurers also have the opportunity to use their relationships to transmit their approaches and goals to partners within their ecosystem. Thus, insurers can realize a broad and comprehensive positive change.
As part of their declared corporate identity, insurers have a prominent role in promoting social development and meeting social needs. They are therefore naturally suited to a pioneering role. They should start by promoting a corporate culture in which sustainability assumes a critical function and is embedded in the consciousness of employees, especially of decision makers with clearly assigned responsibility.
As with any major change, the ESG transformation requires early movers. However, these early movers have the potential to gain a significant market advantage. One of our ESG Insurance studies revealed that one out of two private policyholders will include sustainability promises as a selection criterion when choosing their insurer. A full 80% would like to learn more from their insurer about sustainable products and services. Thus, the earlier the insurer embarks on the ESG journey, the greater its business opportunities.