InsuranceSector Report - 4th in a series

T his Eurosif sector report has been compiled with research by Bank Sarasin. It describes the major socialand environmental challenges facing the European insurance industry and the associated risks andopportunities these pose for long-term returns.

As the direct environmental and social impact of the insurance sector is comparatively small, a comprehensivesustainability management approach (including indirect impacts) is still lacking in most companies. However,awareness of current environmental and social risks such as climate change has grown.

INSURANCE OVERVIEW● More than 5,000 insurance companies are operating in the

European market, employing about one million people andgenerating a premium income of about €1trillion.

● Insurance can be divided into two types of activities: Life (61% of premium income) and Non-Life (39%).1 Motor, accident &health and property insurance are the most important Non-Lifecategories. An additional activity is Reinsurance, or the“insurance of the insurers”.

● Insurance companies, especially Life, are important institutional asset owners. In 2005 the European assets undermanagement stood at about €6.4 trillion (more than 50 % of GDP).

● The insurance sector is a mature industry with modest growthrates. Europe accounts for 36 % of global premium income(North America 36 %, Japan 15 %). Emerging markets onlyaccount for 12 %, but experience a faster growth (4.5 % per yearcompared to 3 % in industrialised countries for 2000-2005).2

CASE STUDIES

Insurance companies are directlyaffected by large-scale “non-financial”environmental and social risks, such asclimate change, resulting in increasingnatural catastrophe losses. These riskschallenge the insurance companiesforemost, but also open up oppor-tunities to develop innovative productsand services to mitigate climate changerisks. Examples for concrete actionsinclude:

● Improving climate risk predictionand traditional risk management:Swiss Re, Munich Re and othercompanies have established specialresearch teams on climate change. As atraditional risk management measure,

an improved predictability of climaterisks can be used as a basis for premiumdifferentiation. Allianz and AXA havestarted to integrate emerging risks,including climate change, into theirstandard risk assessment processes.

● Innovative insurance products andservices: some insurance companieshave developed insurance protectingagainst the consequences of climatechange: AXA has partnered with theWorld Food Program on a humanitarianinsurance for droughts and otherweather risks in developing countries.Product innovations supportingclimate-friendly behaviour and techno-logies include pay-as-you-drive car

insurance or property insurancewith premium credits for greenbuildings (Aviva).

● Financing climate-friendly tech-nologies: Allianz for instance planto invest between €300 and €500million into renewable energyprojects by 2010.

● Services supporting emissionreduction and energy conser-vation: The European EmissionTrading System is the centralpolitical instrument to reducecarbon emissions in the EU. Somecompanies like Swiss Re haveestablished emission trading andconsulting services.

in USD bn,at 2006 prices

120

100

80

60

40

20

0

1970 1975 1980 1985 1990 1995 2000 2005

*2006 : provisional figures Man-made disasters Natural catastrophes

INSURANCE TRENDS● Losses from natural catastrophes (attributed to some extent

to climate change) and geopolitical risks are on the rise. ForNon-Life insurers this growing risk exposure has resulted inlarger capital cover relative to premium income.

● For both Life and Non-Life, asset management activities(investment income and fees) have been the most importantsources of profit, rather than the underwriting result(margins of premiums over incurred losses).4 In the case of Life,this is due to the development of saving oriented products(fixed and variable annuities). The dependence on the capitalmarket involves related risks, such as stock market crashes (e.g.2001-2003), inflation and low interest rates.

● Distribution is of strategic importance for insurancecompanies, both in terms of sales promotion and expenses.Although distribution channels differ largely between countries,independent distribution is gaining importance everywhere.

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1 Source: CEA (European Insurance and Reinsurance Federation). 20052 Source: Swiss Re Economic Research & Consulting

3 Source: Swiss Re. Sigma No. 5/20064 Only in recent years the underwriting results have turned into slightly positive zones.

● In Europe, Life Insurance is growing fairly fast (more than 7%per year in 2000-2005), compared to Non-Life (less than 1%)and global insurance (around 3%).3

● Demography is a major driver of the insurance business,especially for life and health insurance. The aging population inmost industrialised countries is posing a burden on publicretirement schemes and contributes to increasing health costs.This opens up new growth opportunities for Life Insurance, asa private supplement to public retirement schemes, and agrowing demand for health insurance coverage.

● As a consequence of rising investment risks and marketingissues, the sector has been the target of stricter regulationsand litigation. At the European level, the new “Solvency II”regulation (to be effective by 2010) will require a re-assessment of capital requirements and the establishmentof improved risk assessment and management procedures.

Making a difference in mitigating climate change risks

● Insurance companies are very impor-tant institutional asset owners in theeconomy and derive a large portion oftheir profits from this activity. Socialand environmental “extra-financial”risks can have substantial impact onthe economy and hence the financialperformance and valuation of insu-rance companies’ assets. Some compa-nies have integrated SRI (SociallyResponsible Investment) elements intotheir investment processes in order toreduce these risks or capitalise onrelated opportunities.

● Storebrand applies a comparativelycomprehensive approach by usingsocial and environmental criteria forall of its pension, insurance andmutual fund products. All pension andlife insurance investments are subjectto exclusion criteria (manufacturingof landmines, cluster bombs ortobacco products, involvement inhuman rights violations, weak envi-ronmental and social responsibilityperformance).

● Less rigorously, Munich Re screens itsinvestments in shares and bonds byusing sustainability ratings. Accordingto the company, more than 80% of itsassets meet their sustainability requi-rements. Allianz applies a similarscreening process but has also investeda small part of its assets into dedicatedSRI funds.

● Some insurance companies have alsodirected investments into companiesoffering environmentally friendlytechnologies such as renewable energy.

Sustainable Investment - Reducing risks and capitalising onopportunities in asset management

More information: www.swissre.com, www.munichre.com, www.allianz.com, www.axa.fr, www.aviva.com, www.storebrand.com

Eurosif wishes to acknowledge the support and direction provided by the Insurance Sector Report Steering Committee:Crédit Agricole Asset Management

Dexia Insurance ServicesForética

Groupama Asset ManagementOddo Securities

This sector report, created with the support of the European Commission, has been compiled by:

11 avenue de l’Opéra • 75001 Paris, FranceTel/Fax : +33 (0)1 40 20 43 38

contact@eurosif.org • www.eurosif.org

Elisabethenstrasse 62 • CH-4002 Basel, SwitzerlandTel: +41 61 277 75 62 / Fax: +41 61 277 76 88

eckhard.plinke@sarasin.ch • www.sarasin.ch/sustainability

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Market Capitalisation of Largest European Insurance Companies Insured losses 1970-2006*

May 2007

KEY CHALLENGES5SOCIAL & ENVIRONMENTAL ISSUES MATERIAL RISKS & OPPORTUNITIES● Misleading advertising for insurance products, lack of

transparency, such as “small print” in contracts, ormisleading information by sales agents are issues whichhave given rise to controversies with clients and thepublic at large. This led to a tightening of regulationsimposed by financial supervisory bodies.

● Most insurance companies work with large networks ofinternal and external agents or alternative channelssuch as broker-dealers. Business practices are difficultto control in these networks, because of theircomplexity and size, as well as the independence of theexternal agents and brokers. Furthermore, as they areusually paid on a commission basis, their financialincentives can be contradictory to clients’ interests.

● Controversial contracting and marketing practices and improper handling of complaints have frequentlyresulted in legal controversies, prosecution and finallyconsiderable fines and compensation payments for theinsurance companies involved.

● Companies striving to install high ethical business standards and quality of services not only avoid suchfinancial risks, but will also benefit from a high loyaltyof their clients. Establishing formal quality and ethicalstandards in the companies’ distribution organisation isessential. The enforcement of these standards, throughtraining, information programmes and monitoringprocedures, is equally crucial.

● In contrast with other industries, insurance companiesare primarily affected by the consequences of globalenvironmental and social challenges, rather than directlycausing them.

● Climate change, caused by greenhouse gas emissions, isincreasing the frequency and intensity of naturaldisasters.6 Their risks are also getting more and moreunpredictable. As a result, the monetary volume ofdamages resulting from natural disasters such as floodsand storms is increasing continuously. Recent examplesinclude hurricanes in the US which pushed globalinsured losses to record heights: they surpassed $100billion in 2005, while they had never exceeded a level of$40 billion in a single year since 1970.

● The occurrence of geopolitical risks, including social andpolitical tensions or terrorist attacks, is also hard topredict and can entail high claims for insurers. Thedamages caused by the terrorist attacks of September11, 2001 were over $20 billion.

● The impact of new technologies on human health andthe environment, such as genetic engineering ornanotechnology, is not yet fully understood and couldresult in product liability claims in the future.

● Other long-term issues include rising costs related to“unsustainable” lifestyles and growing consumption levels,such as food consumption resulting in ever increasingproblems with obesity or traffic density resulting in healthissues (accidents, noise and air pollution).

● Unanticipated natural disasters caused by climatechange, illnesses and/or environmental degradationcaused by new technologies, terrorist attacks and socialconflicts can all lead to high incurred losses for insurersand finally to stock volatility for the companies. Thelosses are distributed between direct insurers and re-insurers depending on the specific contract conditions.Insurance companies therefore need to develop a newapproach that will deal with greater uncertainty andhigher claims.

● To improve the management of these sustainability-related risks, insurance companies can set up specificresearch programs into their causes and effects. Doingso, insurers will increase the predictability of potential

events and amount of claims and will allow for riskselection in insurance premiums.

● The development of prevention schemes and campaigns(for example on road safety, healthy lifestyles orenvironmental protection) and a premiumdifferentiation can contribute to a reduction of long-term risks and stimulate a more “sustainable” behaviourof clients.

● Developing innovative insurance products or newbusiness areas related to the management ofenvironmental and social risks can even representmarket opportunities for insurance companies. Examplesinclude the development of insurance products tomitigate climate change risks (see case study).

● Insurance policies can be complex and some clients maynot understand all the contract details (fees, coverageand related restrictions). This can result in complaintsfrom clients over coverage or premiums and in legalcontroversies.

● Life insurance as well as some casualty insurancecompanies attempt to single-out high-risk clientgroups in order to exclude them from coverage ordifferentiate the risk premiums. While this strategy is

rational and to some extent in the interest of theinsured, some practices are perceived as discriminatory.Examples include the systematic genetic screening ofclients to single-out high-risk groups for life insurancecontracts. While genetic screening is forbidden in someEuropean countries, it is still debated in others.

● Some underprivileged and low-income groups, especiallyin developing countries, cannot afford insurancecoverage.

● High ethical standards and initiatives to raise financialliteracy levels can contribute to more transparency anda reduction in controversies and client complaints. A fewleading insurance companies are active in offering basicfinancial education to customers, especially women andyoung people. Other insurers work on simplifyingcontracts (e.g. the Plain English standards in the UK) inorder to increase their understanding.

● Exclusion of high-risk client groups from insurance coverage can cause public criticism and intervention,whereas the inclusion of specific risks will provide nichemarket opportunities for insurers. Examples includeaffordable insurance products for low-incomehouseholds, such as affordable housing insuranceschemes offered in the UK, or special insurance productsfor disabled persons in Norway. Another example ismicro-insurance for developing countries, which makesan important contribution to economic development inemerging and developing countries (e.g. accident andlife coverage at affordable premiums).

Integration intocore business

(Reinsurance, Non-Life)

Access toInsurance Services

(Life, Non-Life)

● Insurance companies, Life Insurance especially, are veryimportant institutional asset owners. It has becomeconventional wisdom that sustainability issues(greenhouse gas emissions causing climate change,

resource consumption, globalisation of productionprocesses, etc.) have an impact on the financialperformance of companies and hence their stock prices.

● Neglecting general environmental and social impacts inasset management can result in a reduction in returnsor an increase in volatility of asset management overall.

● Some insurance companies have integrated extra-financial factors and elements of Socially ResponsibleInvestment (SRI) into their investment processes,contributing to risk reduction and/or higher returns.Some experts regard this practice even as a fiduciaryduty for trustees and asset managers.7 (see case study)

Sustainable AssetManagement

(Life mainly)

● Insurance companies are continuously working toincrease efficiency and reduce administrative costs. Aspersonnel expenses account usually for one third ofacquisition and administrative expenses, a number ofcompanies have reduced staff significantly in recent years.

● Similarly to other service industries, the outsourcing ofsales forces (to independent agents) and the “off-shoring” of call centres and back-office functions todeveloping countries (India and Sri Lanka) have beenmeasures to reduce costs.

● Some insurance companies also experience an aging oftheir staff.

● Workforce reductions may cause labour disputes,demotivation and “brain drain” among employees.

● Outsourcing can result in service quality or marketplaceconduct issues. Recently a large insurance companydecided to stop using an Indian call centre for customer-service calls, because of clients’ grievances.

● For companies with an aging workforce, retirementdepartures need to be properly pre-empted in therecruiting and training processes, in order to avoid loss oftechnical know-how and experience among the staff.

● Socially responsible Human Resources planning and wellthought-out downsizing programs will improveemployees’ loyalty and motivation, as well as attractand maintain talent.

Human ResourcesManagement

5 AThe specific insurance business activity most affected by the listed key challenges is indicated under each issue.6 Source: WWF, Climate change and extreme weather events.

7 See UNEP FI / Freshfields Bruckhaus Deringer report “A legal framework for the Integration of environmental, social andgovernance issues into institutional investment”.

Marketplaceconduct

(Life, Non-Life)

InsuranceSector Report - 4th in a series

T his Eurosif sector report has been compiled with research by Bank Sarasin. It describes the major socialand environmental challenges facing the European insurance industry and the associated risks andopportunities these pose for long-term returns.

As the direct environmental and social impact of the insurance sector is comparatively small, a comprehensivesustainability management approach (including indirect impacts) is still lacking in most companies. However,awareness of current environmental and social risks such as climate change has grown.

INSURANCE OVERVIEW● More than 5,000 insurance companies are operating in the

European market, employing about one million people andgenerating a premium income of about €1trillion.

● Insurance can be divided into two types of activities: Life (61% of premium income) and Non-Life (39%).1 Motor, accident &health and property insurance are the most important Non-Lifecategories. An additional activity is Reinsurance, or the“insurance of the insurers”.

● Insurance companies, especially Life, are important institutional asset owners. In 2005 the European assets undermanagement stood at about €6.4 trillion (more than 50 % of GDP).

● The insurance sector is a mature industry with modest growthrates. Europe accounts for 36 % of global premium income(North America 36 %, Japan 15 %). Emerging markets onlyaccount for 12 %, but experience a faster growth (4.5 % per yearcompared to 3 % in industrialised countries for 2000-2005).2

CASE STUDIES

Insurance companies are directlyaffected by large-scale “non-financial”environmental and social risks, such asclimate change, resulting in increasingnatural catastrophe losses. These riskschallenge the insurance companiesforemost, but also open up oppor-tunities to develop innovative productsand services to mitigate climate changerisks. Examples for concrete actionsinclude:

● Improving climate risk predictionand traditional risk management:Swiss Re, Munich Re and othercompanies have established specialresearch teams on climate change. As atraditional risk management measure,

an improved predictability of climaterisks can be used as a basis for premiumdifferentiation. Allianz and AXA havestarted to integrate emerging risks,including climate change, into theirstandard risk assessment processes.

● Innovative insurance products andservices: some insurance companieshave developed insurance protectingagainst the consequences of climatechange: AXA has partnered with theWorld Food Program on a humanitarianinsurance for droughts and otherweather risks in developing countries.Product innovations supportingclimate-friendly behaviour and techno-logies include pay-as-you-drive car

insurance or property insurancewith premium credits for greenbuildings (Aviva).

● Financing climate-friendly tech-nologies: Allianz for instance planto invest between €300 and €500million into renewable energyprojects by 2010.

● Services supporting emissionreduction and energy conser-vation: The European EmissionTrading System is the centralpolitical instrument to reducecarbon emissions in the EU. Somecompanies like Swiss Re haveestablished emission trading andconsulting services.

in USD bn,at 2006 prices

120

100

80

60

40

20

0

1970 1975 1980 1985 1990 1995 2000 2005

*2006 : provisional figures Man-made disasters Natural catastrophes

INSURANCE TRENDS● Losses from natural catastrophes (attributed to some extent

to climate change) and geopolitical risks are on the rise. ForNon-Life insurers this growing risk exposure has resulted inlarger capital cover relative to premium income.

● For both Life and Non-Life, asset management activities(investment income and fees) have been the most importantsources of profit, rather than the underwriting result(margins of premiums over incurred losses).4 In the case of Life,this is due to the development of saving oriented products(fixed and variable annuities). The dependence on the capitalmarket involves related risks, such as stock market crashes (e.g.2001-2003), inflation and low interest rates.

● Distribution is of strategic importance for insurancecompanies, both in terms of sales promotion and expenses.Although distribution channels differ largely between countries,independent distribution is gaining importance everywhere.

Sour

ce: M

SCI,

Mar

ch 2

007.

Sour

ce: S

wis

s Re

, Dec

embe

r 20

06

1 Source: CEA (European Insurance and Reinsurance Federation). 20052 Source: Swiss Re Economic Research & Consulting

3 Source: Swiss Re. Sigma No. 5/20064 Only in recent years the underwriting results have turned into slightly positive zones.

● In Europe, Life Insurance is growing fairly fast (more than 7%per year in 2000-2005), compared to Non-Life (less than 1%)and global insurance (around 3%).3

● Demography is a major driver of the insurance business,especially for life and health insurance. The aging population inmost industrialised countries is posing a burden on publicretirement schemes and contributes to increasing health costs.This opens up new growth opportunities for Life Insurance, asa private supplement to public retirement schemes, and agrowing demand for health insurance coverage.

● As a consequence of rising investment risks and marketingissues, the sector has been the target of stricter regulationsand litigation. At the European level, the new “Solvency II”regulation (to be effective by 2010) will require a re-assessment of capital requirements and the establishmentof improved risk assessment and management procedures.

Making a difference in mitigating climate change risks

● Insurance companies are very impor-tant institutional asset owners in theeconomy and derive a large portion oftheir profits from this activity. Socialand environmental “extra-financial”risks can have substantial impact onthe economy and hence the financialperformance and valuation of insu-rance companies’ assets. Some compa-nies have integrated SRI (SociallyResponsible Investment) elements intotheir investment processes in order toreduce these risks or capitalise onrelated opportunities.

● Storebrand applies a comparativelycomprehensive approach by usingsocial and environmental criteria forall of its pension, insurance andmutual fund products. All pension andlife insurance investments are subjectto exclusion criteria (manufacturingof landmines, cluster bombs ortobacco products, involvement inhuman rights violations, weak envi-ronmental and social responsibilityperformance).

● Less rigorously, Munich Re screens itsinvestments in shares and bonds byusing sustainability ratings. Accordingto the company, more than 80% of itsassets meet their sustainability requi-rements. Allianz applies a similarscreening process but has also investeda small part of its assets into dedicatedSRI funds.

● Some insurance companies have alsodirected investments into companiesoffering environmentally friendlytechnologies such as renewable energy.

Sustainable Investment - Reducing risks and capitalising onopportunities in asset management

More information: www.swissre.com, www.munichre.com, www.allianz.com, www.axa.fr, www.aviva.com, www.storebrand.com

Eurosif wishes to acknowledge the support and direction provided by the Insurance Sector Report Steering Committee:Crédit Agricole Asset Management

Dexia Insurance ServicesForética

Groupama Asset ManagementOddo Securities

This sector report, created with the support of the European Commission, has been compiled by:

11 avenue de l’Opéra • 75001 Paris, FranceTel/Fax : +33 (0)1 40 20 43 38

contact@eurosif.org • www.eurosif.org

Elisabethenstrasse 62 • CH-4002 Basel, SwitzerlandTel: +41 61 277 75 62 / Fax: +41 61 277 76 88

eckhard.plinke@sarasin.ch • www.sarasin.ch/sustainability

Des

igne

r : C

atsa

ï - w

ww

.cat

sai.n

et /

The

view

s in

thi

s do

cum

ent

do n

ot n

eces

saril

y re

pres

ent

the

view

s of

all

Euro

sif

mem

ber

affil

iate

s. T

his

publ

icat

ion

shou

ld n

ot b

e ta

ken

as f

inan

cial

adv

ice

or s

een

as a

n en

dors

emen

t of

any

par

ticu

lar

com

pany

, org

anis

atio

n or

indi

vidu

al.

Market Capitalisation of Largest European Insurance Companies Insured losses 1970-2006*

May 2007