Despite increased interest and progress in relation to sustainability within insurance, there remains an understandable tension between what is profitable and sustainable when it comes to claims, particularly business interruption (BI). To address these challenges, the insurance industry could consider coverage promoting the measurement of carbon footprints, understanding biodiversity risks, and providing environmental incentives to aid the drive to net zero.
Background
Recently, with COP29 Baku, Azerbaijan and COP16 Cali, Colombia, 196 countries agreed on 23 targets to stop biodiversity loss by 2030. The goal is to effectively conserve and manage at least 30% of the earth’s surface and scale positive incentives for biodiversity.
Climate and biodiversity issues are receiving increasing attention within the insurance industry. The Corporate Sustainability Reporting Directive, January 2024, and the Biodiversity Net Gain (BNG) provisions introduced under the Environment Act 2021 have created an expanding web of business regulation.
Yet, while insurers have integrated environmental, social, and governance (ESG) considerations at an operational and strategic investment level, claims, particularly those related to property and business interruption, pose more of a challenge. Following an insured event, BI policies are typically prescriptive and do not give scope for businesses to pursue greater sustainability due to the potential negative impact on profitability and the economics of such decisions.
So, what are the key factors?
Traditional vs. sustainable turnover
Current BI policies define insured turnover as the revenue payable to the insured for goods and services sold in the ordinary course of business. It is hard to see how sustainable practices would fall into this definition. Moreover, it is unlikely this would allow scope for a company to diversify its practices encompassing sustainable activities or provide support for such decisions in a BI claim.
Underwriters may face challenges in covering diverse activities aligned with more sustainable business practices. For example, if a traditional farming business has diversified to generate income through waste or packaging recycling, an insured loss could result in a legitimate shortfall in turnover. If an insured peril destroys the raw materials required for these activities, it could eliminate the source of waste needed to generate additional revenue, leading to significant financial losses. Underwriters could consider this and arrange coverage appropriately, potentially on a revenue rather than gross profit basis.
As more businesses diversify and explore “green service offerings,” insurers could shift their mindset from covering traditional turnover to ‘sustainable turnover’; this may promote the re-use or shared consumption of tool rentals or asset leasing. How the business accounts for this is key in terms of the BI policy response.
Policy stipulations
The specified Maximum Indemnity Period (MIP) in business interruption policies creates challenges. Once damage triggers a policy, the clock starts ticking to reinstate and mitigate losses. It is time-sensitive with a sole focus on speed rather than considering more sustainable recovery methods.
When mitigating a loss or getting a business back up and running, sustainable options may also fail to meet the economic test for increased costs or even additional increased cost of working cover, as must be considered “reasonable”. For instance, implementing energy-efficient technologies, such as intelligent heating systems, could contribute to sustainability and enhance business efficiencies over time. However, these solutions may not have immediate benefits to insurers and could extend beyond the MIP, so would likely not be considered within the policy, despite making the business more sustainable in the future. Insurers may wish to consider adapting policy terms in light of these changing business needs, thus offering a more ‘competitively sustainable’ insurance product.
Climate-friendly machinery
Another common issue affecting business interruption claims is the fact that, in the short term, transitioning to more climate-friendly machinery may not be as productive. Repairing existing equipment may be the quickest and most economical solution. However, opting for replacement with newer, greener alternatives may be more time-consuming and expensive. This approach can also require extra training, research, development, and significant upfront costs. Currently, standard policies may not cover this if existing machinery is still repairable, even if it continues to rely on carbon-intensive fossil fuels.
The same challenges apply to the supply chain. The focus, once again, is speed and the race to source materials, widgets, grain, packaging, etc., to expedite recovery, but this can come at a cost to the environment. Could a longer, more costly route be considered that puts less pressure on the planet? This may involve working with suppliers that reduce transportation times or adhere to sustainable and ethical practices but at a greater cost.
It’s worth noting that businesses must increasingly consider potential compliance issues, regulations and/or fines related to operating environmentally damaging equipment, which could further complicate decision-making.
So, how do we overcome these challenges?
Measuring carbon emissions and environmental risks
Using a carbon calculator in the claims process can help insurers and adjusters make more informed decisions. These calculators assess key sources of carbon emissions and generate a report that quantifies the carbon cost in tonnes. The calculator enables accurate and detailed reporting by considering factors such as plant operations, fuel use, transportation, waste materials, and electricity consumption. This can ultimately reduce the carbon footprint throughout the claims journey.
Understanding biodiversity risks
Insurers have different tools, including geospatial technologies and sensitivity mapping, to better understand risks and assess the impact on biodiversity in the event of an incident. This data can also be shared with clients, enabling them to make more informed resource allocation decisions, particularly in areas with higher environmental sensitivity. Insurers could also use this data to evidence their own ESG policies/ targets.
Policy environmental incentives
After accurately measuring emissions within the sector, the insurance industry could consider implementing premium discounts tied to the adoption of renewable energy or emissions reductions during reinstatement. This approach would represent a significant shift toward long-term sustainable value.
In summary
Balancing profitability and sustainability in business interruption insurance remains a complex challenge, requiring new approaches to policy wording and claims management. By incorporating tools like carbon calculators and offering environmental incentives, the insurance industry can take meaningful steps. This would create more competition for the planet as opposed to just the insurance market.
