Crime Insurance: Insure Your Food & Agriculture Company

Secrets about Crime Insurance

Crime Insurance provides coverage for events not covered by most property or liability insurance policies.

Different Crime Insurance Clauses

There are several ways that businesses could be exposed to crime, both from within the organisation as a result of employee infidelity and from third parties. Crime Insurance provides coverage for events not covered by most property or liability insurance policies:

  • Clause 1 – Employee Infidelity: This clause protects the company from dishonest and fraudulent acts of the employees. This is the major source of all crimes committed against companies worldwide. The clause is very broad and covers almost any crime committed by an employee, whether alone or in collusion with others (both other employees and third parties such as crime gangs) which causes a loss to the company.
  •  Clauses 2 & 3 – Premises and Transit: This is the physical and stock cover for the company and will cover burglary and armed robbery by third parties. It can cover everything from machinery to stock to cash on-premises and has the benefit of covering valuables when in transit as well. Whilst not as effective as a cargo policy, this can provide contingent cover where a third party has a loss, and their insurance does not act.
  • Clauses 4-6 – Forgery and Counterfeiting: These clauses cover the forgery of documents holding a real value and are relied upon by the client for processing cash settlements or disbursement of cash.
  • Clause 7 – Damage due to any of the above clauses: If there is damage to any property as a result of a theft or robbery, then this can be added to the claim. A typical loss here is the destruction of a safe.
  • Additional extension on Computer Crime and Telephonic Crime: This covers the loss to the company by use of a computer or telephone and can have a very broad scope. It is in effect the cover for robbery or theft using a computer rather than a weapon or forced entry. These types of loss are rising due to the less severe penalties for being caught and the fact that they can be carried out remotely, thus lessening the chance of being caught. 

Nature of the Product to be Stolen

As with most businesses, there is a specific risk from the behaviour of employees and some of the causes are listed below. With Agribusiness there is the added threat that they deal in the most stolen goods worldwide accepting cash. There is a simple way of calculating the desirability of products and food that tends to meet all of the definitions to a high degree.

When looking at the product we must consider three themes and if the answer is yes to all three then it is an at-risk product:

  • Desirability – Do people want/need the product?
  • Portability – Is it easy to steal, especially in large volumes?
  • Saleability – Is it easy to sell, would it attract attention to the seller doing s

For example, in Poultry business we can see the following:

  • Desirability – Chicken is the most widely bought meat worldwide and so we can see that there is a demand for chicken products. 
  • Portability – Due to the nature and volume of sales it is surprisingly easy to steal poultry. A faked invoice or paying off the warehousemen or guards on the gates of the processing plant will allow a thief to drive right up to the plant and collect their haul.  
  • Saleability – People want poultry products, and whilst cheap poultry will raise a few eyebrows, it is unlikely that people will turn down the opportunity for cheap food. Selling on a market stall at a food market or arranging with a retailer to buy the products will make this easier, and the police are less likely to question the sale of chicken in this environment. 

So we can see that the products are at real risk, employees working hand in hand with outside groups can cause large losses very quickly here. In the agriculture sector, we have seen numerous large losses worldwide, and usually in basic food such as milk, meat, bread and cereals rather than finished products.

Typical Crime Losses for Food & Agriculture

There are multiple different potential crime losses for Food & Agriculture companies.

  • Addiction Issues  – These individuals start not wanting to be frauds but rapidly turn into a problem for the employee. Typically, they will have a drug, alcohol or gambling issue and will ‘borrow’ money to rectify an immediate situation, always to pay the money back. Usually, the problem spirals out of control and they start taking more and more to fix the problem until they finally realise that they cannot do it and flee. Whilst not the largest losses they can reach some big figures and 1 Mio. EUR is not uncommon, although figures in the hundreds of thousands are more likely.
  • Blackmail   – A member of staff is found in a compromising situation and criminals find out. They use this to force the employee to carry out some tasks to either enable them to access the employer (electronically or physically) or to simply force them to steal themselves. It can be anyone in a company, and losses can be from around 50,000 EUR for a straightforward taking of cash from the safe to millions of Euros from granting access to the computer systems. We see simple ideas such as leaving a door open to targeted blackmail on employees who hold passcodes for payments etc. in this example.
  • Invoice Fraud  – A member of staff who has control of tendering or contracts will conspire with a supplier to inflate invoices. Usually, they will split the difference between the ‘real’ price and the stated price. This will mean that either poor quality services are supplied or overcharged services with reasonable quality are given. This can very quickly add up, and if the staff member is allowed a level of autonomy in this area it can be hard to detect as they will often receive fake quotes to cover the fraud.
  • Delivery Fraud – This often works for hand in hand with either blackmail or general corruption. A gang will find a suitable member of staff who has access to warehouses or other storage facilities and find a way to get them to aid them in their plans. This can be through a simple cut of the profits (Improper Financial Gain) or blackmail. Either way, the staff member will grant them access to the facility through either forged paperwork or being there themselves to open the door. Whole lorry loads of goods can be taken, and losses can mount up quickly. Only when the goods are not paid for, the loss is discovered, which can be some time down the line. Achieving security against this can be difficult as the papers to release the goods will be official and unlikely to be queried at the gate.
  • Bookkeeping Fraud – A simple fraud that involves transfers of money, payments and general accounts of the client. No real sophistication to it – just plain theft. 
  • Social Engineering / Fake Presidents – These are two differing frauds but have the same method at their heart. Both rely on a level of trust either built up over time or gained by electronic means. 

    Social Engineering can take the form of regular phone calls building up a rapport, targeted emails (finding out the hobbies of a member of staff and then sending them links – Spear Phishing), or even working on an out-of-work friendship which then turns into a request for help. All of these come under the Social Engineering banner. Once the trust is established, there will be a request to transfer funds, either for a legitimate-looking reason or for help to the person conducting the fraud. Once the money is transferred, the contact usually ceases immediately.
     Fake Presidents is where a call is made seemingly from the CEO or CFO, usually on a Friday afternoon, requesting an urgent fund transfer. Usually, the reason is that if the transfer does not go ahead, a deal will fall through harming the company. The call will seem to come from the senior staff members but will be the criminals. They can hack phone systems to present the phone number of the person they are impersonating, use email addresses which are one letter different to the person etc. A less sophisticated version is hijacking emails and changing bank details at the last minute, in a deal to the fraudster’s account. 

Conclusion about Crime Insurance in Food & Agriculture

As we can see from the described above cases, “non-tangible damage” (financial) losses, caused by infidelity of employees or third-party criminals, can bring quite a significant gap in the balance sheet of any Food & Agriculture enterprise. On the other hand, such losses are not covered by a standard property damage/business interruption insurance contract. Additional commercial crime insurance policies are recommended. The indemnity limit of 1 million EUR costs starts from 50,000 EUR, as a rule, with the same amount of deductible.

Related Insights

Brian Alexander, GrECo Group Practice Leader Financial Institutions

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

Shylov Maksym, GrECo Practice Leader Food & Agriculture

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Neobanks – Potential for Embedded Insurance

Neobanks are trying to bridge the gap between the offerings of traditional banks and the expectations of customers in this digital era.

What does traditional banking bring to customers? Complex processes, problems with ATMs and load of papers for account opening and loan approval. On the other side, neobanks with their business model are trying to fight these stereotypes by offering digital banking platforms with end-2-end services, no or low fees and excellent customer experience.

Neobanks are trying to bridge the gap between the offerings of traditional banks and the expectations of customers in this digital era.

What is a Neobank?

Neobanks, which are sometimes referred to as “challenger banks” are financial institutions that have positioned themselves as the cheaper alternative in comparison to traditional ones. They are fintech companies offering different technological solutions (like apps or software) to modernise mobile and online banking. In most cases they are focused on specific financial products (e.g. loans, accounts, savings) leveraging technology and artificial intelligence to offer tailor made services to the customer while, at the same time, minimising operating costs.

Neobanks vs Traditional Banks

Neobanks are still on the rise, but it would be hard to expect them to have many advantages over the traditional banks. Traditional banks have two very crucial advantages – money sources and the trust of their customers. Still, their complex legacy systems are the major burden they are carrying and for them it will be difficult to adapt to the digital needs of the technologically oriented generation.

On the other hand, neobanks might not be “equipped” with money sources like traditional banks, but they can fight in other areas – field of innovation – allowing them to act faster to the demanding needs of the customer by introducing innovative products fast and easy and offering excellent customer service.

Popular Neobanks

CHIME
With more than 12 million users, Chime is the most recognised brand in the neobank space in the U.S. The platform eliminates many of the common fees typically associated with traditional banks and provides credit-building opportunities, early access to direct deposit payments and automatic savings features with a competitive annual percentage yield.

VARO BANK
Initially founded as neobank in 2020, Varo Bank was changed to a bank. It offers services like Chime, including no monthly or overdraft fees and no minimum balance requirement. Users don’t need to undergo a credit check to open an account.

CURRENT
Current has also attracted hundreds of thousands of customers in the U.S. It offers benefits such as early access to direct deposit, fee-free overdrafts and cash back on debit card purchases.

Embedded Insurance for Neobanks

Working in the environment that is very competitive, like FinTech is, makes offering embedded insurance the best way to catch the interest of the customer. Insurance not only helps bringing trust in the mobile banking app by protecting customers purchases but increases the expenses of the customer and, ultimately the revenue for the neobank.

Embedding insurance plays a crucial role in the customer acquisition process by creating additional value for the customer in terms of new and innovative product solutions and for the neobank in terms of enhanced and value-loaded banking products they can offer.

Related Insights

Alma Ribanovic

Group Practice Leader Affinity

T: +43 50404 180

Embedded Insurance – The Name of the Game

Person buying embeded insurance

Embedded insurance is the future. It creates win-win-win situation for all parties involved.

What is one of the biggest issues we face in the insurance industry nowadays? It is the fact that selling insurance, which is not purchased together with a product or service, becomes quite ineffective and inefficient. The consequence of this “separate sales” is that the insurance product is very often rejected by the customer as unappealing hassle what, at the end, results in a huge protection gap. And due to market changes in terms of digitalisation, climate changes and lack of innovation, this gap is just getting bigger.

Buying insurance online represents significant issue for majority of customers. Why? Simply because the customer journey is inadequate and complex. Most of the insurances are still sold offline. True, they are researched online, but purchase cannot be done.

How can we solve this gap?

It is about embedding the insurance into the digital service offering. It is important that insurance is offered on the spot when the need is there and the risk to the buyer is paramount. Embedded insurance bundles the insurance coverage or protection with the purchase of a core product or service. It means that the insurance is not sold separately to the customer, but it is provided as a normal feature of the core product or service. That is, the customer gets more affordable, relevant and personalised insurance when they need it most.

Various tech players present on the market are very well equipped to embed insurance into their e-platforms mostly because they are the ones who control important insurance topics like:

  • Customer Journey: As life is moving rapidly into the online sphere, tech players are the ones who can best influence and control the customer journey. They are able to meet the customer where they are, offer insurance product when they need it and, by that, increase the penetration rates of insurance sales in comparison to separate insurance purchases.
  • Data: One of the biggest assets of tech players is that they have the data about the customers browsing history, transaction history etc. Data are up to date and can be used by insurers for better underwriting, risk selection and risk monitoring.
  • Trust: Digital services enjoy high levels of customer trust due to superior customer experience they offer. This is the perfect opportunity for insurance companies, as embedded insurance can help close the trust gap between insurers and digital services.
  • Communication: Tech players are in constant contact with their customers via diverse digital channels in comparison to insurers who contact their customers mostly only on renewals. By offering embedded insurance, insurers can use these communication channels to increase the connection to their customer base.

How is the market doing it?

Ant Group manages a digital financial services platform in China with an enormous user base due to the ubiquity of Alipay and the superapp they’ve created around it. In terms of insurance they spotted a large underserved market in low-income rural areas that traditional insurers were ignoring. Rather than trying to resell existing insurance products from one or two partners, they created their own insurtech platform to connect demand with supply in a new way. Ant Group focuses on understanding the needs of its consumers, educating them about the value of insurance and then designing compelling solutions for them with its suppliers.

Its insurance partners take on most of the underwriting and regulatory risk and deliver products to Ant’s specification. The company now offers 2000 customised, affordable and flexible life and non-life products from 90 different insurance suppliers.

Uber is another big online platform with a close relationship with its users including its 3 million drivers worldwide. At any time, depending on local regulations, competitive threats and new market opportunities, Uber requires the flexibility to provide its drivers with different types of insurance, benefits and incentives, related to vehicle and personal injury cover, sickness, paternity pay or other income loss.

Some of its insurance solutions are provided to drivers for free, some are invisible, some are optional add-ons. Some are related to when the driver is ‘in service’, some not. Given the size of its driver base, it has the potential to offer more complex products like pensions, life and health insurance in the future, in addition to other financial services like the bank accounts and loans it already offers.

In all cases Uber prides itself on the simplicity of its user experience and requires insurance solutions which are easy to adopt, good value and quick to claim against.

Embedded insurance is the future. It creates win-win-win situation for all parties involved – tech players, insurers and customers enabling better protection of consumers, creating added value and strengthening the value proposition.

Related Insights

Alma Ribanovic

Group Practice Leader Affinity

T: +43 50404 180

The Consequences of Opening Up

What does this mean for crime and D&O insurance?

As the light at the end of the Covid-19 tunnel comes into view, what can we expect when we return to the office? Unfortunately, times of uncertainty tend to also be the times of higher fraud and also times of blame.

To look to the closest analogy, we have in recent times, the 2008 financial crisis is the nearest we have to an unprecedented event such as the Covid-19 crisis. When times were good mistakes and irregularities tended to be overlooked especially in the banking sector. As the liquidity crisis started to hit home it required everyone to open their books and see what their real position was. What they saw was often a mess of poor control and lax lending / borrowing. In the good times, controls had dropped – we need only look to USA where the practice of NINJA (No Income, No Job or Assets) or Self Certified loans was running rampant leading to systematic fraud and the collapse of several famous banks in the country. In UK there was a thriving industry in defrauding banks on Buy to Let loans which also brought down some venerable old names. Generally loan fraud was running rampant in the Western banking system.

The rise of crime and D&O policies for banks in CEE

In my own experience of dealing with banks in Central and Eastern Europe this was a time of increased claims on the Crime polices of the banks, a lot of things that would be overlooked in the past were now being looked at more closely and the number of fraud claims tripled in just one year. The amounts were relatively large and showed that there had been lip service paid to lending controls and controls around accounts of wealthy clients.

There was also the first real increase in litigation against banks and commercial entities as lenders and shareholders looked for somebody to blame. When money is lost there is always someone whose fault it is, particularly when investment companies are involved. This led to the start of the interest in Directors and Officers insurance on a large scale in CEE.

So what can we expect in the coming year as the economies open up?

Given past events we would expect to see the discovery of more frauds. The average timeline of a major fraud in a bank is around 18 months, so if we look at July as being a realistic time for most controls to be released then this will mean that the whole of the Crisis from the first lockdown onwards will almost exactly match this timeline. The lack of supervision whilst working from home will have tempted some to try to defraud their employer (statistically around 0.2-0.5% of employees are committing fraud at any given time, mostly petty), combine this with the uncertainty around whether there will be jobs to return to and you have a potent mix for crime to flourish. We can also add to this the fact that desperate businesses may have been susceptible to paying ‘gratuities’ to helpful loan officers – a very common form of employee infidelity.

As businesses survey the wreckage of the past 18 months they will also have a battle for survival. Investors will try to minimize their losses and are likely to resort to litigation when there is no other option. This will likely take the form of looking into decisions made by the boards in the run up to and during the lockdowns (Did they close too early? Were they too cautious? Did they not move quickly enough to take advantage of the new normal?). It should also be remembered that Liquidators see a Directors and Officers policy as an asset of the company.

More frauds to be discovered after the Covid-19 crisis

In conclusion, if we see a similar trend as in 2008, then we will expect an increase in events which can be covered by Crime and D&O insurance. There is no reason to doubt that this will be the case as the underlying issues are similar in that a strong worldwide economy was moving towards recession and a devastating event pushed it over the edge. The liquidity crisis of 2007 onwards came from a lack of trust forming as recession started to appear on the horizon, Covid-19 struck just as the fundamentals were turning as well. Policies in boom times by their nature are more lax than desirable as we move for growth.

As Warren Buffett said: “Only when the tide goes out do you discover who’s been swimming naked.”

Related Insights

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

“We are the friendly face who is there to ensure that the process runs smoothly.”

Brian Alexander, Group Practice Leader Financial Institutions, talks with Robert Lloyd, Director at ASL about trends in Crime & Cyber claims, the effects of Covid-19 on claims and the neutral and objective position of the loss adjuster.

Alexander: Can you tell us a little bit about how you got into adjusting?

Lloyd: I qualified as a chartered accountant in 2009 specialising in audit. Whilst this was great experience, I wanted more variation in my day to day work and the opportunity to travel internationally.

If I’m being completely honest, I came across ASL by chance. The role sounded extremely interesting – so I went for it. I met the Senior Directors at the time and they talked about trips to Latin America, cash being stolen from armoured cars and bank robberies. It was fascinating and I’m still captivated 11 years later!

Alexander: How does the adjusting process work?

Lloyd: We’re appointed by Insurers to investigate the facts of a claim and the amount of the loss. To do this, we provide the Insured with one or more written lists of information and documentation required.

If it’s a small loss, we may just correspond with the Insured through the Brokers. Alternatively, if it’s a large and/or complex loss, we will typically travel to the Insured, wherever they are in the world, and go through our questions with them face to face. Video meetings are increasingly playing a part too.

Once we have all the information, we prepare a report to the Insurers setting out our findings. Based on our report, the Insurers decide whether or not the claim is payable and, if so, how much.

It’s important to note that, whilst we are appointed by the Insurers, we provide a neutral and objective assessment of the claim.

Alexander: What are the benefits of the adjusting process to an insured (client)?

Lloyd: The loss adjuster facilitates the entire claims process. At the outset, we can help guide the Insured as to what they should and shouldn’t do – we can help them try to mitigate their loss and prevent a recurrence.

Then, by asking targeted questions, and requesting only relevant documentation, the adjuster is able to efficiently extract the information required by the Insurers to determine policy response. The adjuster also ensures that the Insured’s representations are properly and clearly communicated to the Insurers.

Additionally, the loss adjuster is someone that the Insured can speak with, along with their Broker, to discuss the status of the claim or simply to explain how the process works – we deal with crime and cyber claims every day and are therefore very comfortable with the process and the issues that arise. The adjuster should be a friendly face who is there to ensure that the process runs smoothly and that the correct outcome is achieved for all parties.

In those instances where coverage issues arise, and in order to manage expectations, the adjuster is also able to work with the Broker to explain these to the Insured.

Alexander: What are the current trends you see in Crime and Cyber claims?

Lloyd:

  • An ever-increasing number of social engineering frauds where an Insured is tricked, usually over email, into paying away money by fraudsters pretending to be a colleague, client or supplier. This affects both Banks and commercial entities with cover potentially available under crime and cyber policies.
  • More ransomware attacks. This is where criminals insert malware into an Insured’s computer system and encrypt data. It typically takes a week or more to get the systems back online resulting in a loss of income, which can be claimed under the business interruption section of a cyber policy.
  • Frauds involving transactions made via mobile telephone / cellphone – exacerbated by the growth of mobile banking in developing countries.
  • We continue to see numerous loan frauds across the world – and particularly in Eastern Europe. These often involve dishonest employees within Banks colluding to issue loans in return for kickbacks.
  • We’re seeing fewer claims involving the forcible theft of cash from Banks’ premises, ATMs and in transit. Perhaps that’s because running into a branch with an automatic weapon gives a much higher risk of being caught than trying a social engineering fraud or hacking into a Bank’s system. The amount that can be stolen by forcible theft is typically is much lower too!

Alexander: Has Covid-19 seen an increase in claims from what you see?

Lloyd:

  • We’ve seen a marked increase in ransomware attacks and social engineering frauds because remote working has presented the ideal conditions for these types of fraud.
  • There’s been a temporary drop off in more conventional fraud being notified – such as individuals stealing money from their employers. However, this is likely because Insureds have only recently returned to their offices, or are yet to do so, and so have not yet uncovered these schemes. The pandemic has created the ideal environment for fraud and we’re expecting to see significantly increased volumes of crime claims later this year and into 2021.
  • There have also been more loan frauds notified by the large Trade Finance Banks. This is because the pandemic has caused a number of their corporate clients to default – and the Banks’ subsequent enquires have led them to believe that some of those loans may have been obtained under false pretences. The Banks therefore notify the matter to their crime policies.

About ASL
ASL are market leading loss adjusters and forensic accountants. We specialise in dealing with crime claims made by Banks and commercial entities. We also handle cyber claims.

ASL’s professional staff includes chartered accountants and lawyers. This gives us the necessary expertise when it comes to quantifying complex losses and providing coverage analysis for the crime and cyber Insurers.

We have offices in London and Dubai and, since 1988, have handled assignments in over 100 countries.

Related Insights

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

Safe through troublesome times

Investment policy of the insurance industry

After banks, the insurance sector is the second largest asset manager in Europe. The assets consist to a large extent of the funds paid in by the insured in the life insurance, on the other hand they serve to secure the obligations arising from the insurance contracts for the payment of claims. The asset strategy is checked by the supervisory authorities in each country and its principles must correspond to the provisions of EU law Solvency II. A management report from the supervisory authority provides information on the status and development of the investments (see: EIOPA Data and Figures Financial Stability Report: Investment split).

Traditional and new investment forms

The most important instrument for long-term security of the invested assets and regular income are bonds, which make up around 60% of all investments. These are divided into government bonds, corporate bonds and bond funds. The distribution between these forms differs from country to country and depends on the bid of the respective state or the private bond issues. As with all other investments, the decline in interest rates is noticeable, but insurers are reacting to this by taking out bonds with ever longer terms. In life insurance in particular, remaining terms of around 10 years can be found in the existing portfolios in Germany and Austria, while terms in other countries are still 5 to 6 years. In the next few years, however, there will be a major shift in this part of the assets when bonds expire and can only be replaced by those with a lower yield. So that the level of interest rates does not fall too sharply, there is a tendency towards bonds from issuers with lower credit ratings, but these still make up a very small part of the portfolio. In terms of issuers, insurers concentrate on European countries and companies in addition to their home countries, with a focus on the large industrialized nations of France, Germany, the Netherlands and Belgium.

Investing in shares, apart from strategic investments and the establishment of own corporations, has lost a lot of importance after the crises at the beginning of the new millennium. The possible volatility is difficult to reconcile with the insurance business model and with the new regulations. In Austria, the share of equity investments fell to 1.2% in 2018, in other countries it is slightly higher, but without reaching the former proportions (e.g. 20 to 30% in Switzerland).

In search of an interesting total return, real estate investment has received a new boost. This form of investment is historically important for insurers because it also makes a reliable contribution to stable values and regular income. The construction boom of recent years, both in residential construction and in the construction of commercial properties with the corresponding financing requirements, has also given the insurance sector new impetus. In Austria, the total investment in real estate on the market has grown to over 10%; with individual companies, real estate is already the second major pillar of all investments with a share of around 40%. This development is similar across Europe, with local differences that result from the economic development of the respective country.

The construction sector is also an opportunity for other investments by insurers: there is an increasing willingness to invest in infrastructure projects and to participate in private-public partnerships in order to make an interesting contribution to total returns (search-for-yield policy). In recent years, the share of this type of investment has tripled due to the great demand. The investment of the insurer is rounded off by individual loans, mortgages and cash deposits at banks, which make up a maximum of 10% of the total portfolio.

Which influencing factors can be expected that can determine the success of the investment policy?

In recent years, the positive factors (very good international economic situation with steady growth, increase in the volume of insurance premiums, investments in large infrastructure projects) have been countered by the pronounced low interest rate phase as the most important negative parameter. Uncertainty factors in both directions included climate change, Brexit, demographic changes, increasing digitization and the beginning of a trade dispute between the great powers.

Then the global economy was surprised by Covid-19. The economic consequences of the pandemic and the countermeasures that have a direct negative impact on the economy cannot yet be assessed today. The insurance business model will have to accept certain losses both in the core area (receipt of premiums to finance claims and pensions) and in the investment field. The long-term nature of the business in both areas and the investment in countries and companies with very good credit ratings (75% of all bonds relate to the three best credit ratings) suggest that the insurance industry will also master this crisis very well.

Related Insights

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

Sustainable Finance – a new basis for private pension schemes

EU climate policy with huge impact on insurance based investment products

With the target of making Europe climate-neutral by 2050 the European Union is publishing some regulations with direct impact on the products of the financial market.

Keyword Sustainable Finance

The basis is the “Regulation to facilitate sustainable investment” 2020/852 EU that was published on June 18th, 2020. It is also called briefly Regulation on “Taxonomy” or “Sustainable Finance”. It makes a classification which investments are in compliance with the six environmental objectives:

  • climate change mitigation,
  • climate change adaptation,
  • sustainable use and protection of water and marine resources,
  • transition to a circular economy, waste prevention and recycling,
  • pollution prevention and control and
  • protection of healthy ecosystems

and will therefore be considered as sustainable investments. The first two objectives will apply from January 1st, 2022, the four remaining from January 1st, 2023. The classification of concrete investments (for instance decarbonisation) and benchmarks (e.g. the 2° C limitation of global warming) is being prepared.

In most cases, investments mean the use of foreign capital as bonds, credits, share capital, which can be offered to investors also as packaged products, for instance for saving money for future pensions. Therefore the Regulation on “Taxonomy” is accompanied by Regulation 2019/2088 “on sustainability‐related disclosures in the financial services sector”. This one has already been published and will apply from March 10th, 2021. There is a deadline for implementing the technical standards of details to be disclosed until January 1st, 2022. The Regulation stipulates full information and transparency on sustainable investments and activities including risks and adverse impacts resulting therefrom and will focus in the first instance on the field of “energy efficiency”. This is valid for the activities of the companies working in the financial sector as well as for the promotion of financial products and advice given in connection with them.

Effects on life insurance

Part of the financial products are Insurance based investment products (IBIP), i.e. life insurance products the value of which is exposed to market fluctuations. Among them we find unit linked or index linked insurances but also traditional life insurances and pension schemes. There is a dispute in some countries whether classical life insurances without explicit connection to an investment product belong to these, but the matter stands without clarification so far. All these products will have to offer in future information on the sustainability of the underlying investment or on the distribution of the investment portfolio according to the criteria of the Regulation, in addition to the existing information on capital security, interest rates, portfolio distribution to branches and countries and similar data. It may be expected that there will be numerous new products with sustainability as their main feature.

This leads to an extension of the advice offered by the insurance intermediary. Besides questioning the client in respect of his economical demands and needs he has to find out also the client’s ideas and preferences in respect of sustainable investments and must offer him adequate products. Of course, the “Best Advice” principle applies, the important aspect is to find the best financial solution for the client. Sustainable products that are more expensive than traditional products or have a higher capital and revenue risk can be placed only upon clear order of the client. This shall be stipulated by a third EU regulation in connection with the Insurance Distribution Directive (IDD), the details of which are currently under discussion.

We shall continuously report on further changes and developments regarding financial products.

Related Insights

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229