One thing is already clear: the European Commission's Taxonomy Regulation will force financial service providers to become more sustainable. How exactly this will happen is still open. For insurers, the new legal requirements will affect both sides of the balance sheet. The capital investment on the assets side must be designed in such a way that by the middle of the century there are no more fossil activities in the portfolio. And on the liabilities side, insurers will increasingly have to say goodbye to risks associated with high CO2 consumption.
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The reporting standards in force since the beginning of the year are changing the management of investment and underwriting, i.e. the underwriting of insurance risks. "This is still relatively easy to apply to the investment business," says Fred Wagner, insurance professor at the University of Leipzig. "But if they have to be applied throughout the business model, including risk selection and product design in the insurance business, it becomes complex."
Companies are currently trying to find clear indications of how they should implement the rules. The rules apply in some sectors, but not in others. They are binding for disability, medical expenses, occupational accidents, car, maritime, air and transport policies. They also apply to fire, building, household contents and business interruption insurance. In the case of legal protection, it is unclear, liability is not covered, because there are no protection objectives of the EU affected.
Everything depends on three letters
"From a legal point of view, it is anything but clear, and the business implications are even more unclear," says Michael Fortmann, who teaches regulatory issues at the Technical University of Cologne. Insurers would have to provide an ESG score in percent, which should continuously improve. The abbreviation ESG stands for environmental, social and corporate governance. But even the question of how the percentage should be stated is only decided in operational practice. The industry's own operations must not violate the EU's environmental objectives.
Although hedging fossil fuel industries is not prohibited, it can seriously disrupt the percentage. "Insurers will rethink their activities, and it will be more difficult for oil companies," says insurance professor Fortmann. "High-volume businesses that have a strong impact on taxonomy value are likely to be more scrutinized in the future."
The taxonomy can affect the entire business model of insurers. For this reason, listed companies in particular, which are therefore under pressure from investors, calculate these with management consultants. She has even discussed the impact on private health insurance with clients, says Simone Schwemer, head of ESG Central Europe Insurance at the Boston Consulting Group (BCG). However, it was concluded that the demands on customers to eat more sustainably interfered too much with their freedom. "There will and must be changes in the retail sector. But the big lever for insurers lies in the industrial business," she says.
Portfolios with an unclear footprint
The regulation of the EU is nevertheless a strong intervention, says her colleague Christopher Freese, Managing Partner of BCG. In no other than the financial services industry would companies be held jointly liable for climate protection projects. Unlike investment behaviour, the insurance business is a black box. "The underwriting portfolio is the most unclear for insurers. It's very complex, you have to understand what your footprint looks like," says Freese. His advisors try to make the specifications manageable. Insurers with a fleet of insured combustion cars would have to be prepared to compensate for the value elsewhere for a good taxonomy score.
After all: "There is now a defined standard for measuring emissions in an insurance portfolio, which enables comparability and management. In motor vehicles, at least in Germany, this is also relatively easy to do," says Freese. It is more difficult in the areas of household contents and residential buildings, where data on consumption values of apartments and houses are more difficult to obtain.
ESG becomes inevitable
Some insurers have defined a new role: as advisors to companies and households looking to optimise their ESG footprint. Even if the taxonomy values have so far had no immediate consequences and only have much effect as soon as customers pay attention to them, no industry participant will be able to avoid the topic. "Every company has to deal with ESG, investors will pay attention to that," says BCG consultant Schwemer.
Insurance professor Wagner describes a scenario in which non-governmental organisations are putting pressure on the industry, but at the same time no insurance emergency must arise. As long as activities are allowed, insurers can also underwrite fossil risks. "The industry must ask itself how it can position itself as a transformation companion and show development paths of companies so that they position themselves more sustainably," he says.
These topics are currently being discussed intensively, says Theresa Jost, Managing Director of the German Sustainability Network, in which the industry discusses open questions about sustainability. "Something will change in claims management," she says. The industry will have an impact on the building stock, she expects. "How is damage regulated, how can something be rebuilt sustainably?" But she does not currently see a total change in the business model.