Most insurers have been focusing their sustainability strategies in direct operations and investments, with a growing number now widening the aperture to include underwriting. Only a few early movers have integrated sustainability into their claims processes.

Every insurer should follow their lead. As the claims supply chain comes into scope for sustainability disclosure standards, such as the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) and the International Financial Reporting Standards (IFRS S2) insurers must start estimating their claims emissions — among other sustainability impacts — and quickly develop strategies to reduce them.

While measuring a supply chain’s footprint comes with significant challenges, such as insufficient data, emissions modeling, and supplier engagement, insurers have three compelling reasons to start. First, claims fulfilment is a major driver of an insurer’s overall environmental footprint, and any comprehensive sustainability strategy must include it. Claims supply chain emissions can be more than an order of magnitude greater than operational emissions for a typical property and casualty (P&C) insurer and can be equally significant for health insurers. Moreover, claims processes can have material impacts on resource use and pollution, both of which are attracting increasing attention as part of the emerging nature agenda.

Second, claims fulfilment is the most visible and direct way an insurer can support customers’ sustainability ambitions and demonstrate its green credentials. Our research on how people value corporate action on sustainability has shown that customers place more value on tangible company action to become more sustainable than they do on the targets and commitments a company announces.

Finally, regulations and investors increasingly require insurers to complete this process. Like all businesses, insurers face growing pressure to measure and disclose their Scope 3 emissions. This includes the claims supply chains — Scope 3, Category 1 is, for example, purchased goods and services. In the EU, the CSRD demands it. So does the climate disclosure requirement of the IFRS, which a growing number of jurisdictions and investors around the world are adopting. Investors now expect companies, including insurers, to disclose their Scope 3 emissions. In addition, the full value chain perspective is not restricted to climate. Other sustainability topics, such as protecting nature and human rights, increasingly require taking the supply chain into account.

Building a sustainable claims strategy

Understanding the full extent of the claims supply chain’s footprint is necessary, but it is not a simple undertaking. It involves important methodological choices about what to include. Should downstream emissions after cash settlement be added? There are also multiple data and modeling challenges associated with estimating the emissions — or other environmental impacts — embedded in materials, replacement goods, and repair activities.

These challenges are not insurmountable. We have successfully worked with clients and used our 3D carbon accounting business to develop bottom-up estimates of claims emissions for our insurance clients, identifying where the main sources of emissions are by line of business, claims type, supplier and material or activity. By taking this view of the supply chain, insurers can tailor their sustainability strategy accordingly, prioritizing the most material drivers of emissions and identifying the most important suppliers to work with in addressing them.

Along with collaborating with suppliers, insurers have a range of other levers at their disposal, including changing policy language, rolling out prevention services, developing new products, or changing underwriting guidance. For example, an internal carbon price can be an effective way to integrate emissions into existing procurement processes and product economics.

Balancing climate and business impacts in the claims process

The greatest challenge for insurers during this process is identifying strategies that not only cut emissions, but do so without undermining commercial imperatives. Low-carbon fulfilment, for example, often entails the use of more expensive materials and processes. Options such as prioritizing ‘repair over replace’ may displease customers who would prefer a new item. It is therefore critical to evaluate choices based on cost and customer experience alongside their potential to reduce emissions.

Insurers also must grapple with the disconnect between what drives their supply chain emissions and what they can directly influence. In a typical P&C claims supply chain involving the repair of vehicles and buildings, upstream materials such as steel, cement and glass largely drive emissions. Insurers have limited power to impact these supply chains. And while they have considerable influence over direct suppliers such as body shops, builder networks, and loss adjusters, they hold less sway over material manufacturers and original equipment manufacturers (OEMs).

Addressing these emissions requires working with others to build new alliances and ecosystems in various markets. For example, motor insurers could work with industry associations, repair networks, parts providers, OEMs, and governments to develop sustainable repair standards, increase supply of lower emission parts, and build circular supply chains for refurbished components.

Despite what can be a challenging journey, creating a sustainable supply chain can have measurable impact. When done well, the process offers insurers the opportunity to align claims processes with wider corporate sustainability ambitions, engage customers, and create differentiation in the industry.