Green insurance: how to reach Net Zero for insurers

Jan 24

The global momentum towards net-zero emissions is undeniable, and the insurance industry is poised to play a pivotal role in this transition. By launching green insurance products, insurers can not only contribute to the fight against climate change but also create new revenue streams and stay ahead of emerging trends.

This article delves into the importance of green insurance, its key elements, and a step-by-step guide to building a green car insurance product, with a particular emphasis on avoiding greenwashing.

The business case for green insurance

Green insurance isn't just a marketing scheme – it's a strategic business move. The monetized carbon footprint of an insurance product can impact the combined ratio by 2-4% points. By offering green insurance products, insurers can gain a competitive edge, cater to the growing demand for eco-friendly products and services, and work towards achieving net-zero emissions across their value chain.

Moreover, green insurance products can help mitigate climate-related risks and provide financial security to policyholders. They also boost investor confidence, as environmental considerations are becoming increasingly important investment criteria.

The perils of greenwashing

Insurers must operate with caution to avoid allegations of greenwashing – the practice of making misleading or unsubstantiated claims about the environmental benefits of a product, service, or company. It is specially important now that EU Parliament voted in favor of a law to ban greenwashing in their Green Claims Directive.

Greenwashing can erode trust, harm a company's reputation, and potentially lead to regulatory or legal action. Therefore, it's essential that insurers develop green insurance products that genuinely contribute to sustainability and progress towards net-zero emissions.

What makes an insurance product green?

A green insurance product incorporates all the elements of a traditional insurance product, but with additional terms and conditions that promote a circular economy and environmental sustainability. These may include:

Terms and conditions that favor repair over replacement and the use of recycled materials and spare parts
Terms and conditions that exclude certain risks due to environmental criteria
Correct pricing of the carbon footprint associated with the insurance and expected claims
A commitment by the insurer to offset the remaining carbon footprint

For instance, in a green car insurance product, the insurer might commit to ensuring that its claims handling supply-chain (car workshops and repair firms) follows environmental standards and prioritizes repair over replacement, maximizing the use of recycled spare parts that are safe and in mint condition.

From a greenhouse gas accounting and reporting perspective, a truly net-zero car insurance policy needs to account for two sources of indirect scope 3 emissions:

Emissions caused by the insured car (insurance-associated emissions)
Emissions caused by repairing damages (claims related emissions)

Thus, to brand a car insurance as truly net zero, an insurer needs to ensure that all of these emissions are reduced as much as possible and that any remaining emissions are removed.

Building a green car insurance product: A step-by-step guide

Define the product: Start by defining the terms and conditions of the insurance product. This should include conditions that favor environmentally friendly practices, such as repairing instead of replacing parts whenever possible and utilizing recycled spare parts.

Set environmental standards: Ensure that your claims handling supply-chain follows environmental standards. This could mean partnering with car workshops and repair firms that prioritize sustainable practices and have their sustainability reporting in order.

Incorporate circular economy principles: Promote, require, and monitor that your claims handling supply-chain follows your principles of circular economy.

Price correctly: The pricing of your green insurance product should reflect its environmental benefits and the cost for achieving net-zero. This could also mean higher premiums for policyholders who do not meet certain environmental criteria.

Compensate for carbon footprint: Ensure that the remaining carbon footprint of the insurance product will be compensated. This could be achieved through investments in carbon offset projects or other forms of carbon removal.

Communicate the benefits: Finally, communicate the benefits of your green insurance product to potential policyholders. Highlight how they can contribute to the fight against climate change by choosing your product.

Conclusion

Green insurance products represent a significant opportunity for insurers to contribute to the fight against climate change, while also staying competitive in an increasingly environmentally conscious market.

By launching green insurance products, insurers can help their policyholders mitigate climate-related risks, boost investor confidence, and move closer to achieving net-zero emissions across their value chain. Claims Carbon continues supporting insurers in designing green insurance products.