How to benefit from the rise of sustainable insurance

Robert Eigenheer, group treasurer at Swiss Federal Railways, provides a five-step guide on how to make sustainable insurance work to your best advantage.

What is sustainable insurance? According to the United Nations Principles for Sustainable Insurance launched in 2012, sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done in a responsible and forward-looking way by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and corporate governance (ESG) issues. 

Sustainable insurance aims to reduce risk, develop innovative solutions, improve business performance, and contribute to environmental, social and economic sustainability at the same time. The insurance sector has achieved significant progress in adapting its investment portfolios and that is the basis we leverage for a practical approach to support target achievement in underwriting activities as well.

By the end of August 2024, in collaboration with AXA XL, Helvetia Insurance and Zurich Insurance, Swiss Federal Railways (SBB) and its captive SBB Insurance launched the world’s first sustainability-linked reinsurance project with the aim of integrating sustainability into its underwriting activities. 

This groundbreaking pilot project fosters a collaborative approach, encouraging all stakeholders to actively support each other in achieving their sustainability objectives.

SBB, Switzerland’s major mobility provider, runs an insurance captive out of Liechtenstein and is using that captive to drive sustainability initiatives by putting sustainability-related targets into its contracts with its reinsurers. 

SBB Insurance stands out as one of the few direct insurance captives in Europe, opting against a reinsurance captive model due to the complexity of insuring railway risks. By directly underwriting these risks, the company establishes itself as an industry pioneer, prioritising equitable collaboration with more than 20 reinsurers globally. This partnership is built on shared expertise in risk engineering, transparent communication, and a profound understanding of insurance and railway operations. Together, these elements create a strong foundation of trust, benefiting all parties involved—insurers and the insured.

Five steps

A clear, five-step approach can be taken to integrate sustainability into insurance activities, a method that can assist insurance companies to achieve their sustainability targets within their underwriting portfolios as well as financially reinforce the insured organisation’s sustainability efforts. 

The subsequent concept is designed to be understandable, simple, realisable, measurable, and effective—where the insured organisation needs to consider the following steps.

1. The first step in aligning an insurance programme towards sustainability is choosing a relevant metric that aligns with the sustainability objectives of the insured and the insurer. An appropriate key performance indicator (KPI) should have three key attributes:

Measurable: the KPI must be clearly defined and quantifiable.

Influenceable: the insured organisation should be able to positively impact the KPI.

Existing: ideally, it is a KPI that is already tracked and reported by the insured organisation.

A common and broadly accepted KPI is carbon dioxide emissions. However, other ESG metrics may be suitable, depending on your organisation’s focus. The beauty of this sustainability-linked concept is its flexibility to choose the KPI that is most relevant to your organisation—as long as it fits the three criteria mentioned above.

As can be expected the devil is in the detail. For example, looking at carbon dioxide emissions to highlight some questions, does the KPI include scope 3 emissions, or only scopes 1 and 2? Does it cover all three aspects of ESG, or just one? There can be even more questions, depending on the metric chosen as a KPI.

2. Once the KPI is defined, the next step is to set an ambitious sustainability performance target (SPT). If you already have SPTs, enter into discussions with your insurer to explore ways to expand and strengthen your existing target setting. 

But how do you set appropriate targets for your sustainability-linked insurance programme? Your organisation probably has long-term sustainability goals for 2030, 2040, or even 2050, which extend far beyond the typical duration of insurance contracts. This creates a time mismatch that needs to be addressed.

Setting targets

Let us again take carbon dioxide emissions as an example. Suppose your organisation aims to halve its carbon dioxide emissions by 2030. Such a commitment is ideally supported by the Science-Based Targets initiative (SBTi) methodology. Contrary to your long-term ambitions, your insurance contract usually lasts only one or a few years. There are two approaches to breaking down this long-term objective to fit the duration of the contract.

The first is the top-down approach. This is a very simple method. Divide the total emissions reduction required by the remaining years until your long-term target date. This gives you the SPT for the duration of your insurance contract.

The second is the bottom-up approach. This method is more complex. Evaluate all the sustainability projects planned for the duration of the contract and matching the contract period. Then, sum up the projects’ impact on carbon dioxide emissions.

Although these two approaches may not yield identical results, what matters most is that ambitious targets are set for the insurance contract period. By aiming high, you drive meaningful progress within a manageable timeframe, aligning short-term actions with long-term goals. 

3. In the third step, the insured and insurer can collaborate to convert the defined KPI and the corresponding SPT into a payoff matrix that links to the achievement of your sustainability targets. This parameter can be the bonus/penalty component based on the achievement of SPTs.

For example, the following legal excerpt is designed to stimulate thought on structuring such an agreement in existing insurance contracts. 

“The parties agree to include a sustainability component in the insurance contract, whereby the annual net premium is to be supplemented by a bonus/penalty component linked to the achievement of a SPT of the insured. The corresponding KPI for the SPT is measured by [reduction in carbon dioxide emissions, ESG rating, etc]. The KPI is reported in the sustainability report. 

“The bonus/penalty component is defined as a percentage of the annual net premium. Payment of the bonus/penalty component is calculated as follows: annual net premium times bonus/penalty component times degree of target achievement. Any bonus/penalty payment is paid into a sustainability fund or must be used for sustainability projects. 

“The degree of achievement for the SPT is defined as follows: SPT is set at [target reduction of carbon dioxide emissions, target ESG rating, etc], whereas the maximum bonus of 100 percent is set at an upper-level [reduction of carbon dioxide emissions, ESG rating, etc] and the maximum penalty of -100 percent is set at a lower level [reduction of carbon dioxide emissions, ESG rating, etc]. The bonus/penalty component is limited to a target achievement level of +/-100 percent. The achievement is interpolated and rounded to the nearest full percentage point.”

4. The fourth step is straightforward and ideally already in place: officially state and report your KPI and SPT. Sustainability requires transparency, and organisations must disclose their data. Regular reporting tracks progress and holds an organisation accountable for its sustainability goals. By openly sharing achievements and challenges, a company can contribute to a culture of transparency and continuous improvement in sustainability matters.

5. Implementing steps 1 to 4 requires considerable effort, including onboarding all internal stakeholders and finding the right insurance partner to implement such an innovative product. Once these steps are accomplished, it’s crucial to ensure the accuracy and reliability of reporting. Both parties will benefit from having audited figures verified by an independent third party. 

If this is not in place, you have two options for this assurance. First, expand your current external auditor’s scope: extend the mandate of your existing external auditor to include sustainability metrics. This approach leverages an already trusted relationship.

Second, engage a specialised firm: hire a specialised second-party opinion firm to challenge and verify your sustainability concept and reporting. This option ensures an expert evaluation of your sustainability efforts.

By verifying the numbers through independent auditing, you enhance the credibility and reliability of your sustainability-linked insurance programme.

“By openly sharing achievements and challenges, a company can contribute to a culture of transparency and continuous improvement in sustainability matters.”

Benefits

Sustainability-linked products can provide three sets of benefits.

Benefits for insurance companies:

• Measurable and tangible impact: ensure that the insured organisation sets sustainability targets above existing commitments to achieve tangible effects in your underwriting portfolio and make a concrete impact on sustainability.
• Enhanced client engagement: strengthen collaboration with your clients by discussing their sustainability initiatives and gaining access to valuable information that can help refine your underwriting portfolio.
• Innovation leadership: position your insurance company as a pioneer in innovative insurance solutions in the area of sustainability and set the path for a sustainable future.

Benefits for insured organisations:

• Strengthened commitment: reinforce your organisation’s sustainability targets by linking them with financial parameters, enhancing their binding nature and accountability.
• Superior attraction: elevate your status as a sustainable organisation, thereby attracting new talent, clients, and other stakeholders who value sustainability.
• Active promotion: proactively drive sustainability initiatives rather than just reporting on them, showcasing your organisation’s active role in sustainable development.

Impact on sustainability and environment:

• Additional financial resources: allocate financial resources (eg, bonus/penalty payments) towards sustainability projects instead of non-sustainability-related discounts or surcharges.
• Sustainable decision-making: ensure that sustainability considerations carry more weight in corporate decision-making, leveraging advocates for the change into a sustainable future.
• Enhanced transparency: increase disclosure regarding sustainability activities and corresponding reporting where data is openly shared to accelerate the transformation.

In conclusion, sustainability-linked products offer insurance companies a powerful tool to achieve their sustainability commitments. They create a unique win-win-win situation for all parties involved—the insurance company, the insured organisation, and sustainability itself.

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