Swiss captive SBB pilots first-ever sustainability-linked insurance contract

Swiss Federal Railways’ (SBB) direct insurance captive is going to pilot the first-ever sustainability-linked insurance contract, which links premiums to the achievement of the group’s greenhouse gas emissions targets.

The concept, which is attracting interest from risk managers and insurers alike, should also be adopted by other risk managers and insurers, according to Robert Eigenheer, chairman of the board of directors at SBB’s captive – SBB Insurance AG.

Eigenheer presented the concept at the annual Swiss risk and insurance managers (SIRM) conference in Bern, Switzerland this week.

Having previously led the capital markets, treasury and asset management departments at a multilateral development bank, Eigenheer spearheaded the project at SBB. The aim is to transfer the concept of sustainability-linked bonds or loans to the insurance markets – adapting a concept from the financial markets, where such transactions were introduced in 2018.

SBB will pilot the sustainability-linked insurance with insurers AXA XL, Zurich Insurance and Helvetia Insurance next year. If the pilot is successful, the plan is to use the sustainable insurance contract for all property and casualty reinsurance contracts purchased by SBB’s direct insurance captive – SBB Insurance AG – from 2026.

Under the sustainability contract, SBB Insurance AG’s reinsurance premiums are linked to the group’s sustainability performance targets. SBB is aiming to reduce operational greenhouse gas emissions by 50% by 2030 through a transition to renewable energy, alongside an increase in energy efficiency and electrification.

Under the sustainability-linked insurance contract, beating greenhouse gas emissions targets will result in a premium discount and lead to a payment from (re)insurers to support SBB sustainability projects. However, if SBB fails to meet its sustainability targets, the captive pays a ‘malus’ or financial penalty to the insurers for the benefit of sustainability projects. In both cases, the environment benefits, said Eigenheer.

“The new component of a bonus-malus payment linked to sustainability target achievement is very new in the insurance industry. The only difference is that the link in financial markets is to the interest payment, while in insurance it is linked to the premium,” he said.

According to Eigenheer, this is the first time a sustainability component has been applied to large commercial (re)insurance contracts targeting underwriting activities. The idea is simpler to implement via a captive – which has a small number of bilateral agreements with (re)insurers. However, it could be applied to retail insurance contracts as well, said Eigenheer.

“The [concept of a sustainability contract] can be applied to all insurance contracts. There are already ideas how to roll out this concept to other insurance contracts beyond an ordinary reinsurance contract. Such a concept could be applied in the direct insurance market, reinsurance market, it does not matter. The only thing is you need a bilateral agreement with the client and a premium that is linked to the [sustainability] goals. And those targets are not limited to CO2 emissions,” he said.

Eigenheer recommends that these targets are measurable, influenceable and, ideally, already exist.

The hope is that other insurers, captives and risk managers will follow suit. Eigenheer will be “spreading the idea” within the captive and risk management profession, and is already talking with academics and regulators interested in the project.

“It is important for us to see how this is accepted in the industry and among our peers. I have spoken with quite a few experts in the field and some are very interested in the concept – hopefully they will initiate something similar. We started this idea in the Swiss market but wish to see the concept implemented around the globe,” he said.

By implementing a sustainability-linked insurance contract, SBB can strengthen its commitment to sustainability goals, providing a financial incentive to achieve targets and helping the group to become more attractive to stakeholders, explained Eigenheer. For insurers, the concept is a way to meet emission reduction targets in their underwriting portfolio without having to turn business away.

“Many insurers have [sustainability] targets and want to reduce emissions on their underwriting portfolios but do not yet know how they will achieve this. The only approach to reduce CO2 is either to hope for insureds to reduce emissions by themselves, or to exclude oil and gas, which is what they currently do. But this is not a solid plan,” Eigenheer said.

“You would rather work with the insured company to achieve together the CO2 emission reduction. And we invented the perfect instrument because our partners can claim, in the case of SBB, a reduction of their Scope 3 emissions and no negative economic impact. So it should be a no-brainer for insurers to join this initiative in order to meet their own sustainability targets,” Eigenheer said.

He also believes that SBB’s CO2 reduction initiatives improve the company’s risk profile. “If we add hydrogenated vegetable oils to our diesel cargo locomotives, we not only reduce the CO2 emissions but also limit the rotting of the motors and extend the service life. So it’s better for risk,” he said.

“Our sustainability initiatives have a positive impact and reduce the underlying risks. So insurers benefit from both better risk profile of the client and reduction of CO2 emissions with respect to Scope 3,” Eigenheer said.

Sustainability-linked insurance contracts are a simple concept but the challenge is implementation, according to Eigenheer.  The concept can be applied to other environmental social and governance (ESG) goals.

Eigenheer said there are five core components for implementing a sustainable insurance solution: Key performance indicators (KPIs), such as greenhouse gas emissions; the calibration of sustainability targets, based on an organisation’s sustainability goals; insurance characteristics, such as adjustment to terms and conditions; reporting; and verification.

The big challenge when implementing a sustainability-linked contract is to bring together the various internal and external stakeholders and reach agreement, according to Eigenheer.

“It is wise to start now, even if a solution is not perfect yet. If you wait for the perfect solution, you will never start. This is my advice: start, share and learn along the way. No solution is flawless at the very beginning but make sure you start your sustainability journey,” he said.