There’s a growing trend of sustainability and environmental consciousness within the insurance industry. If you haven’t yet heard the term, “sustainable insurance” (also known as “green” or “ethical insurance”) refers to integrating environmental, social, and governance (ESG) criteria into business practices. Insurers are doing their best to incorporate eco-friendly practices and green policies, while incentivizing environmentally responsible behavior. Here’s where it started.
The Background: Principles for Sustainable Insurance
The United Nations’ (UN) Principles for Sustainable Insurance (PSI) were launched in 2012 to guide the insurance industry in addressing environmental, social, and governance risks and opportunities. The principles emphasize collaborating with other groups to raise awareness, enact change, and make decisions with ESG issues in mind:
- Principle 1 – We will embed in our decision-making environmental, social, and governance issues relevant to our insurance business.
- Principle 2 – We will work together with our clients and business partners to raise awareness of environmental, social, and governance issues, manage risk and develop solutions.
- Principle 3 – We will work together with governments, regulators, and other key stakeholders to promote widespread action across society on environmental, social, and governance issues.
- Principle 4 – We will demonstrate accountability and transparency in regularly disclosing publicly our progress is implementing the Principles.
The following are some ways embracing sustainable insurance practices based on these principles can help address climate change concerns while benefiting both policyholders and the industry as a whole.
Risk Mitigation and Adaptation
Sustainable insurance companies focus on identifying, assessing, and mitigating climate-related risks. Insurers can work with clients to implement measures that reduce vulnerabilities to climate impacts, such as extreme weather events and rising sea levels. This can help policyholders by helping to prepare them for inclement weather and potentially reducing their risks to property.
In reducing risk, insurers improve their bottom line. They also show that the insurance industry is climate aware and is committed to helping policyholders navigate the effects of climate change.
Incentivizing Sustainable Practices
Sustainable or “ethical” insurers can opt to offer incentives or discounts for policyholders who adopt sustainable practices, making “going green” more attractive. A few examples to consider are:
- Eco-Friendly Vehicle Discounts: Providing discounts for policyholders who own or switch to eco-friendly vehicles, such as electric or hybrid cars.
- Green Home Improvement Credits: Providing credits or discounts for policyholders who invest in green home improvements, such as energy-efficient windows, insulation, or sustainable roofing materials.
- LEED Certification Incentives: Offering incentives for clients who get Leadership in Energy and Environmental Design (LEED) certifications for their buildings.
- Bundled Policies for Sustainable Practices: Creating bundled insurance packages that include coverage for both traditional insurance needs and specific sustainability-related risks.
Policyholders benefit from the reduced costs while the company can promote itself as a more ethical insurance option.
Climate-Related Data Analysis
A green insurer will use data analytics to assess the impact of climate change on insurance portfolios. This can help them understand emerging risks, set appropriate premiums, and develop strategies for managing climate-related challenges. For example, they may use climate-related data analysis in the following ways:
- Risk Assessment: Climate-related data can help an insurer assess and understand the potential risks associated with specific geographic areas. Analyze historical weather patterns, extreme events, and climate projections to inform underwriting decisions and set appropriate premiums.
- Creating Customized Policies Based on Climate Risks: Insurance policies can be tailored to address the specific climate risks faced by clients in different regions. This may involve offering specialized coverage for events like floods, wildfires, or hurricanes, depending on the prevalent climate risks.
- Staying Informed: Insurers can use real-time climate data and monitoring systems to stay informed about ongoing climate events. This enables agents to provide timely advice to clients, assess potential claims, and take proactive measures to mitigate risks.
- Portfolio Diversification: Climate-related data analytics can help insurers diversify their portfolios based on climate risks to avoid overconcentration in regions prone to specific weather-related challenges. This strategy helps agents balance their exposure and reduce potential losses.
Climate-related data analytics can help the insurance industry stay at the forefront of climate-related changes, bolstering the industry’s reputation and helping insurers best serve their clients.
Engagement in Climate Advocacy
Sustainable insurers may choose to engage in advocacy efforts to promote climate-friendly policies and practices. This may include supporting initiatives for carbon reduction, environmental conservation, or sustainable development. Examples of “boots on the ground” activities include:
- Environmental Educational Initiatives: Launch educational campaigns to inform clients about the environmental impact of certain practices and the benefits of adopting sustainable behaviors. This can raise awareness and encourage positive change.
- Community Service Green Initiatives: Sponsor or participate in local community green initiatives. This could include tree-planting events, recycling drives, or environmental education programs. Clients participating in these initiatives could be recognized or rewarded.
- Green Risk Management Workshops: Organize workshops or webinars to educate clients on sustainable risk management practices. This can help them understand how adopting sustainable measures can mitigate certain risks and lead to insurance benefits.
Taking part in climate advocacy helps to enhance the reputation of the insurance agency and may enhance customer loyalty and attract more like-minded clients.
Disclosure of Climate Risks
Sustainable insurance companies are transparent when it comes to disclosing climate-related risks in their financial reports. This helps investors, policyholders, and regulators stay informed on how insurers are managing and adapting to climate risks. This practice promotes accountability and responsible business practices. Agents can pass this information along to their policyholders.
Integration of Environmental, Social, and Governance (ESG) Criteria
As mentioned above under “Principles of Sustainable Insurance,” sustainable insurance integrates environmental, social, and governance (ESG) criteria into all their investment and underwriting decisions. This ensures that insurers consider environmental, social, and governance factors when underwriting policies, aligning their practices with sustainable principles.
Environmentally-conscious policyholders can then align their insurance choices with their values. Sustainable insurance allows individuals to support companies that prioritize environmental and social responsibility.
Promoting Resilient Communities
Sustainable insurance also focuses on collaborating with local communities to enhance their resilience to the effects of climate change. This may involve supporting infrastructure projects, providing education on climate risks (as in the advocacy section above), and helping to create community-level adaptation strategies. This collaboration can help enhance the reputation of the insurance industry, as insurers are perceived as responsible corporate citizens.
Final Thoughts
In summary, sustainable insurance is a proactive approach that not only addresses climate change concerns but also positively influences the insurance industry and benefits policyholders by aligning insurance practices with broader sustainability goals. By incorporating sustainable practices into insurance operations, the industry can contribute to a more resilient and sustainable global economy. Insurers play a pivotal role in incentivizing climate-friendly behaviors, adapting to changing risks, and supporting the transition to a low-carbon and climate-resilient future.