Net zero car insurance

In our article "Global motor insurance – a major opportunity", we indicated that there is a potential 2-4 percentage points of combined ratio equivalent value in the carbon footprint of the claims settlement process.

This would, however, not be the full carbon footprint associated with motor insurance. Though the internal carbon footprint is fairly marginal (scope 1 and 2), the investment operation could be a sizable contributor (together with the claims process in scope 3), depending on for example, the amount of assets allocated to motor insurance.

Individual motor insurers will of course differ significantly from the above average considerations.

Carbon footprint neutral motor insurance example

Let us now assume that we look at a motor insurer with an aggregated carbon footprint, which could be offset by a five per cent price increase. This insurer makes the following changes to its motor offering:

• Premiums are increased by an average of 5 %.

• The policy is updated with a clause that guarantees that all carbon emissions related to the expected claims, and other carbon footprints, have been compensated.

• Moreover, in order to deliver on this net zero promise to its customers, the insurer would utilize, or further develop, available market mechanisms to offset this carbon footprint. 

This would allow the insurer to market this motor insurance as fully carbon footprint neutral.

The insurance industry, and particularly motor insurers, are sophisticated experts in pricing each insurance risk according to its expected loss record. The infrastructure offered by this "army" of actuaries and pricing analysts can very well be tapped into and extended to the task of differentiating the pricing of this carbon element of the insurance premium. Not everyone should pay 5% for their carbon footprint, and price mechanisms offer a quick route to altered behaviour.

The insurer naturally would take on the risk of whether expected carbon footprint matches the actual outcome. Thus, the advanced forecasting and prediction ability of motor insurers, is another skill set that could be capitalized on when designing variants of net zero motor insurance.

Insurers are also experts in risk management and risk mitigation. There could for example be an opportunity for reinsurers to develop carbon neutral solutions for insurers to tap into – similarly to how the cyber reinsurance solutions have developed over the last few years.

Conclusions

There are many hindrances to building this proposition, of which reliable insurance linked carbon data, and a good way of investing these additional revenues in truly carbon mitigating activity, perhaps are the most important to solve.

However, most insurers know that utilizing the pricing mechanism is key to powerful and quick changes, and the use of carbon pricing in all its shapes and forms is the key lever being utilized across geographies and sectors to reach net zero. 

We are convinced that there are material and growing consumer segments who would embrace this value proposition. Also, there is always the possibility that governments will impose carbon taxes on motor insurance.