The Role of Insurance Companies in the Transition towards a Circular Economy

Insurers are no strangers to environmental concerns. As the economy’s financial first responders, they are often called upon to pay for damages and defend those filing claims involving environmental, social and governance events. In fact, according to a survey by DNV and World Business Council for Sustainable Development (WBCSD), circular economy tactics are rising on corporate businesses internationally. While other studies have been indicating that corporate sustainability is a success factor for businesses around the globe. As such, businesses are expected to become engines for a green positive transition. However, despite the increasing attention in the public, among lawmakers and companies, the shift to business models that design waste out of the system appears to progress very sluggishly. 

Due to the current climate state, the “business as usual” method of running corporations with negative environmental and climate consequences is no longer an option. For example, on average, more than 50% of a corporation’s carbon emissions consists of indirect emissions from the supply chain, which means they do not result from the company’s own operations. Considering this, indirect emissions from insurers may be even greater. A report from insurance giant Allianz suggests that indirect emissions are 76% within the insurance sector.

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How can the insurance industry be more sustainable but still make profit?

In response to rising demands from stakeholders to disclose and address environmental, social and governance concerns, a number of insurance companies are appointing chief sustainability officers or equivalent roles. Yet, some regulators are still unaware or don’t know how to respond to the impact of climate change on their financial stability.

That’s why the sector should envision arrangements and solutions that go beyond conventional risk transfer and risk mitigation to help disadvantaged groups affected by climate change. These strategies could pay out after the occurrence of predefined events rather than insuring the full value of losses. This could reduce the burden of lengthy claim processes for the disadvantaged groups and make coverage more affordable.

Other ideas include establishing more definitive metrics such as serving on cross-functional sustainability committees or publishing a sustainability annual report, as it was recommended by the World Economic Forum, or even offering discounted premiums for flood insurance when low-cost preventive measures are taken, or community-based catastrophe insurance programmes.

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A successful case

As it’s being mentioned throughout the article, a circular economy could be a powerful driver for the triumph of insurance companies. One interesting example comes from a startup in Sweden named Omocom. This is an insurance company that provides on-demand microinsurance for the circular economy and their mission is to keep products in use in a closed loop. According to their website, they want to use insurance solutions to make more people gain the necessary trust to share existing resources with each other and dare buying second-hand items that often actually work just as well as new ones, creating incentives for a more circular economy.

Traditional insurance is built around ownership. In the context of the sharing economy, ‘on-demand microinsurance’ means the insurance is activated only while the items are being used. By reducing the risk of transactions, Omocom increases the probability of effectively changing consumption outlines and helps break the cycle of buying items for non-use.

Although developing closed-loop insurance models could lead to a more sustainable performance, this is not a mandatory goal for all businesses in itself. Instead, the decisive objective is to enhance the sustainability performance of insurance companies by using improved business models. Climate change has become a defining factor in these companies. That’s why a fundamental reshaping of these models is critical in order to counter the destroying consequences of the biggest challenge of our century.

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References:

Delloite. (2021). Building a more sustainable insurance industry. Available on: https://www2.deloitte.com/us/en/insights/industry/financial-services/inclusive-and-sustainable-insurance.html

Johannsdottir, L. (2014). Transforming the linear insurance business model to a closed-loop insurance model: a case study of Nordic non-life insurers. Journal of Cleaner Production, 83, 341–355.

Omocom (2020). Our Mission. Available on: https://www.omocom.eu/om-omocom?lang=en

Saldanha, K. (2021). Sustainability through the insurance lens. Available on: https://insuranceblog.accenture.com/sustainability-through-the-insurance-lens

WBCSD & DNV (2021). DNV Viewpoint survey ‘Circular Economy. How are companies transitioning?’ Available on: https://www.wbcsd.org/Programs/Circular-Economy/News/DNV-Viewpoint-survey-Circular-Economy.-How-are-companies-transitioning

World Economic Forum. (2020) Measuring stakeholder capitalism: Towards common metrics and consistent reporting of sustainable value creation. Available on: https://www.weforum.org/reports/measuring-stakeholder-capitalism-towards-common-metrics-and-consistent-reporting-of-sustainable-value-creation