As a long-term investor, the insurance sector can provide valuable impetus to investment in climate protection. However, the investments must also be economically sustainable.
As large institutional investors, insurers are the ideal partner for the energy transition
© GDV / Malte Knaack
The fight against climate change is the challenge of the century. Europe is to be carbon neutral by 2050. The EU Commission's Green Deal is also a growth strategy, as it should be, since climate change and economic prosperity are not mutually exclusive. However, realising both these goals depends on maintaining sufficient flexibility, market orientation and innovativeness as well as observing the requisite stringency of climate protection regulations. Europe will not be able to assume a leading role in the fight against climate change without a growing economy. With investments in the region of EUR 1.4 trillion, direct insurers are among Germany's largest institutional investors. That makes insurers the ideal partner for the energy transition – not least in their own interests, since a planet warming by an average of four degrees would make many risks practically uninsurable. Moreover, they want to limit the impact of potential climate change-related losses on their own investment portfolio. As a long-term investor, the insurance sector can provide valuable impetus to investment in climate protection. However, the investments must also be economically sustainable as the security of customers’ contributions is the first priority. All the climate models show that we must prepare for more extreme weather events. Whether these events will entail more losses depends on how insurers adapt to this new reality.
7 theories on sustainability
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Theory 1: Sustainability needs to be within the framework of international competition
A Green Deal cannot work without regulation. At the same time, the rules cannot stifle market dynamics or weaken competitiveness: sustainable economic growth in Europe is indispensable to its playing a leading role in combating climate change.
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Theory 2: Insurers make ideal partners for infrastructure projects to protect the environment
The EU estimates that annual investments of EUR 180-290 billion are required to realise the Paris climate targets. Insurers can provide the capital to develop a sustainable infrastructure. They are already one of the greatest advocates of the energy transition, having invested just under EUR 6 billion in sustainable energy projects. The sector wants to increase its contribution, making it the ideal partner: in 2018, German primary insurers increased the value of their infrastructure investments by almost a third to EUR 32 billion. Public-private partnerships fit with the insurance business model with its long-term horizons. However, there is currently a dearth of such projects – particularly in Germany.
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Theory 3: Sustainable investments need standards and flexibility
The definition of sustainability lacks precision. The introduction of a practicable classification system and new standards, for example concerning green bonds, would provide more clarity and transparency for investors and consumers. A certain amount of flexibility when implementing the provisions is equally important. Different sustainability investment strategies can be advisable depending on an insurer's size and specific situation. The motivation must be business-based as opposed to a politically-motivated diversion of capital flows. The right approach is to consistently adopt the “polluter pays” principle through a proportionate pricing system for carbon dioxide emissions.
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Theory 4: Sustainability and profit are not mutually exclusive
A sustainability-based investment strategy can provide good returns and help reduce investment risks. It would thus make sense to consider environmental aspects in investment decisions; after all, German insurers are looking for new investment opportunities for an average of EUR 13 billion every day. However, their investment decisions must invariably comply with the overarching legal regulations of the Insurance Supervisory Act and Solvency II.
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Theory 5: The security of our customers’ contributions is the first priority.
Insurers accept the ecological challenge – however, the top priority has to be the security of customers’ contributions: sustainable investing is more than ecologically correct. Secure and profitable investments are imperative for insurers so they can meet their long-term commitments to customers. That does not change when ecological criteria play a bigger role in investment decisions.
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Theory 6: Changing building regulations today will prevent future losses
The climate change we see today does not come from current emissions: they are a legacy of the past. We must therefore address the consequences of the unavoidable part of climate change in addition to supporting climate preservation. When heavy rain and hail start to pose a growing threat to property, construction planning and building law will have to change – now. The later we start, the greater the economic losses in the future. Once the consequences have occurred, it will be too late. Most construction planning predates scientific discoveries about extreme weather events and climate change.
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Theory 7: Risk awareness – impossible without information
Information and prevention are vital to containing future losses and insuring natural hazards both now and in the future. Insurers do all they can to keep the public informed of the dangers inherent in extreme weather events and natural catastrophes. The experts must step up and raise awareness of hazards and corresponding avoidance measures. Germany needs to start gathering information on natural hazards and making it accessible to the public through a central online portal. Other countries are already doing that. The insurance community is calling for a nationwide natural hazard portal with accompanying information campaigns. It has already demonstrated how that could work in practice through the feasibility study “Kompass Naturgefahren” (natural hazards compass). Localised information about the dangers of flooding, heavy rain, lightning and overvoltage or storm and hail should be a given in a digitalised society.
The Positions of German Insurers in 2020
7 Topics in 7 Theories for download
- Demographic change
- Regulation
- Sustainability
- Mobility
- Digitalisation
- Consumer protection
- Career opportunities in insurance
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