The Circular Economy & Building a More Sustainable Insurance Industry

Sibylle Fischer

February 2, 2023

Innovation, Sustainability

The circular economy is coming. How can insurers successfully support the transition and evolve their business?

How do we define the circular economy?

We have in many ways already begun our transition to a circular economy. Though progress is variable according to industry and location, many businesses and jurisdictions have implemented waste-reducing, climate neutral, resource-efficient practices.

In a circular economy, there is an economic shift from single consumption to reuse. That means adhering to 3 basic principles:

1. Designing out and/or reducing waste and pollution
2. Keeping products and materials in use (i.e. extending the life of a product)
3. Regenerating natural systems

Overall, the circular economy aims to give back to the planet more than it takes, striving always to reduce consumption and waste.

Implications and opportunities for the insurance sector

In the EU, the new circular economy action plan (CEAP), among its many goals, details the European Commission's intention to achieve a 2050 climate neutrality target. It also seeks to promote circular economy processes, encourage sustainable consumption, and ensure that waste is prevented, with resources kept within the EU economy for as long as possible.

An initiative such as the CEAP will have very real implications for the insurance industry, with changes to products, manufacturing and business models impacting exposures, risk transfer and management - from business interruption exposures, to worker/employer liability and compensation, to third-party supply chain exposures.

And these types of changes to the status quo - for example, in automobile and electronics manufacturing, or even in clothing ownership - will alter long held business models and processes. So how can insurers lead the way in this regard? Overall, by creating new products and services that address property/casualty coverages, embedded secondary market product coverage, extended warranty covers or guarantees, and a move toward usage-based insurance.

To that end, continuing to invest in companies and manufacturers that promote the sharing economy - with more focus on consumer rental products, and a move away from ownership models - will be crucial. Baloise's MyCamper partnership uses our "inshareance" model, a highly customizable, integrated insurance solution tailored to enable the sharing of goods. Other companies like 2em and GoMore are also representative of the move to peer-to-peer and car sharing models and platforms. Beyond automobiles, other startups are applying the sharing model to apartment furnishing subscriptions and clothes and accessory rentals.

Similarly, creating incentives for policyholders willing to adopt circular practices, for example, by using more environmentally-friendly products, or repairing items rather than junking them - all put less reliance on our strained global supply chains while also encouraging sustainable habits and practices. At Baloise, we already incentivize our customers to seek high quality repairs whenever possible, saving resources, materials and CO2 emissions - without ever compromising quality.

Also of importance to the insurance sector and startups will be the role of sustainable, digital technology in the circular economy. When technology is trained to take sustainability and renewability into account, the Internet of Things, big data, blockchain and artificial intelligence can all help foster entrepreneurship, support novel sharing business models, and generally help make economies less reliant on finite, non-renewable materials.

While the circular economy transition offers many possibilities for new market entrants and products, there may also be renewed interest in some existing products and concepts. As one such example, environmental pollution liability insurance, though historically underutilized, has been around for decades, with the capability of addressing both traditional and emerging environmental risks.

Accountability through continued action

Bottom line - by taking a proactive stance on sustainability methods and measures, insurance companies not only help accelerate the transition to a circular economy, they likewise support the industry's restructuring toward greener practices. Today, this is an essential evolution, aimed to help reduce pressure on our planet's resources and its people.

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