The ESG imperative for insurers

The ESG imperative for insurers
  • Blog post
  • July 22, 2022

Tim Braasch and Marcus Laakmann

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.

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Strategy& predicts significant and long-lasting implications for insurers

Indeed, Strategy& anticipates substantial developments in the insurance industry as the ESG agenda spreads further and deeper into every aspect of the insurance business.

  • 1ESG demand in life insurance

    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.

  • 2Green washing is not accepted

    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.

  • 3Tick box at broker portals for all products

    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.

  • 4Strong inflow into sustainable assets

    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.

  • 5Holistic value and supply chain perspective will be a prerequisite

    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.

  • 6FinTechs will address ESG linked opportunities

    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.

  • 7Net zero alone is not sufficient

    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.

Maintaining focus and fulfilling obligations

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.

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.

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Tim Braasch

Tim Braasch

Partner, Strategy& Germany

Marcus Laakmann

Marcus Laakmann

Partner, Strategy& Germany