Sustainability in insurance: green products and the role of actuaries
By virtue of their business model, insurers play a key role in addressing climate change and minimizing its impact. By integrating climate risks into their underwriting guidelines, they can work to make industrial sectors "greener" and help industrial companies evolve. In addition, through the instrument of risk equalization in the collective and, in this context, thanks to their actuaries using their expertise in modeling climate risks, insurers can help to ensure that groups of people particularly affected by climate change are supported by society by spreading the risk as widely as possible. Measures can be found, for example, in the area of investments, as part of the development of "green investments" as well as in risk management and in the further development of their own companies. This includes, for example, reducing a company's carbon footprint. Sustainability also plays an important role in the design of "green products" in product development.
Green products: What does that mean?
During product development, answering an extensive catalog of questions clarifies what proportion of the product portfolio is sustainable.
These questions concern, for example, the consideration of climate risks within insurers' actuarial models. In addition, the aim is to use targeted questions to ensure that insurers guarantee a high level of benefits after a catastrophe. For strategic reasons, however, there are several other questions that need to be answered. How can or should the products already existing in the portfolio be further developed? What actually is a "green product"? If not yet or not fully included in products, insurance cover could be extended to include sustainability risks. In doing so, all climate risks that are material for customers should be integrated into the products. To create incentives for customers to act sustainably, premium discounts could be given for energy-efficient buildings, for example. The "repair not replace" philosophy in claims or a repair using sustainable building materials can also be part of a sustainable product offering. New products and services are also emerging in the context of climate change. For example, new sustainable products could include insurance cover for air-source heat pumps, e-car charging points, or other "green technologies." Services could include sustainability consulting services, such as supporting corporate customers with their sustainability strategy and reporting.
Implementation of new product ideas: What should be considered?
When deciding which green product ideas are implemented, various factors should be taken into account. In addition to the question of customer benefits and sales potential, as well as alignment with the corporate strategy, the expenses associated with the launch must also be taken into account. Correct pricing by the actuaries also plays a decisive role. For example, the potential of insuring e-car charging points is great in a rapidly growing market with a simultaneous lack of public charging points. According to the German Federal Motor Transport Authority, there were already around one million e- and hybrid cars as of October 2021, whereas only around 50,000 public charging points existed. In addition, the German government has set itself the goal of having 15 million e-cars on the roads by 2030. In the event of a claim, however, very high payments are to be expected, as an e-car could catch fire due to a short circuit or as a result of being overcharged. According to the German Fire Brigades Association, if the high-voltage battery catches fire, an enormous fire can be expected which takes longer to extinguish than on a conventional vehicle. The fire could also spread to garages and residential buildings as a result. If one wants to include cover of charging points as an additional insurance policy within residential buildings insurance, it may make sense to make it only available if it is purchased with additional risk-mitigation, such as deductibles or mandatory fire protection measures. The insurance company could also send risk engineers to the customer's premises to assist with installation on site, as is already common practice in corporate lines.
Modeling green products: Actuarial expertise is needed
When designing green products, actuaries are considered experts in analyzing data and modeling expected claims payments. As illustrated by the example of e-car charging points, it is not always straightforward to determine the expected loss, and therefore the most important component of the price, when pricing an additional feature or a new product. This is especially true when covering new risks. The overall impact of the offsetting effects on the expected loss requirement, and thus on the price of the insurance, can only be answered over time based on accumulated data and experience. In order for the data to be evaluated by actuaries in their models, it is critical that the information is properly captured in insurers' claims systems, for example, the cause of the loss.
Actuaries play a key role in addressing climate change. The question of what a green product is and what needs to be done in the context of climate change and related regulatory requirements can only be answered through the interaction of actuaries with product developers and other units in insurance companies. There are many ways to design green products, and with them comes the opportunity for insurers to make a positive contribution to the fight against climate change. Actuaries can play a key role in shaping this development through their central role in data analysis and modeling.
Source: Aktuar Aktuell Nr. 57 https://aktuar.de/politik-und-presse/aktuar-aktuell/Documents/Aktuar%20a...