The life insurance industry must ask its customers about their sustainability preferences and inform them about the sustainability features of its products. This is what the EU demands. However, the good intentions are lost in the difficult-to-understand wording and European legal requirements. Simpler, realistic language and "nudging" could help to inspire customers to be more sustainable. Researchers at Dortmund University of Applied Sciences and Arts were able to prove this in a comprehensive study.
The European Union wants to become climate-neutral by 2050 and achieve a comprehensive transformation of its Business Studies. To finance this, large amounts of private funds are to be reallocated, which are tied up in private life and pension insurance policies, among other things. For this reason, customers have had to be asked since 2022 whether they want a minimum proportion of taxonomy-compliant investments or a minimum proportion of environmentally and/or socially sustainable investments in accordance with the Disclosure Regulation before taking out an insurance policy. The latter is summarized under the abbreviation "ESG" (Environment, Social and Governance). It should also be asked whether specific adverse effects on sustainability should be explicitly excluded.
"The terms are difficult for laypeople to understand, and even experts can hardly explain the difference between taxonomy-compliant and ESG-compliant investments," says Prof. Dr. Matthias Beenken. He teaches insurance economics at Fachhochschule Dortmund and comes from the industry. "There is also the potential for disappointment, because customers interested in sustainability understandably want high minimum percentages, but these are not yet available on the market," adds his colleague Prof. Dr. Lukas Linnenbrink, Endowed Professor of Insurance and Risk Management at Fachhochschule Dortmund. He has also worked in the industry for many years.
Lots of information, little information
The mandatory information on the sustainability features of the offers, which is stipulated by European law right down to the layout details, does not help either. "It starts with the fact that they have to be headed 'Financial product' instead of 'Insurance'," criticizes Linnenbrink. The sometimes seemingly contradictory mandatory graphics also cause more confusion than clarification. Prof. Beenken states: "We looked at offers on the market that typically comprised around 100 pages of mandatory information and insurance conditions, including between 11 and 13 pages on the aspect of sustainability alone - nobody reads that and it doesn't help anyone."
In their representative study "Sales of sustainable insurance", researchers at the Faculty of Business Studies at Fachhochschule Dortmund investigated whether better information could help customers to opt for sustainable insurance investment products. At the same time, the effect of incentives in the advisory process - also known as "nudging" - was to be tested. The fictitious offer of a unit-linked pension insurance policy for retirement provision was used for the studies.
Three out of ten customers want the sustainable option
In the experiment with 2,000 test subjects, 29% were interested in taking out sustainable pension insurance. A further 19 percent could also imagine taking out a non-sustainable variant of the same pension insurance. Only 23% were certain that they would not take out either option. The rest did not want to commit themselves.
In the experiment, the participants were divided into 15 groups that were exposed to various incentive factors: advance information on sustainability, an emotional sustainability survey, a sustainability seal and a pre-selection of the desired answer, also known as the default option. Some groups were exposed to only one of these incentives, others to a combination of several. The control group had none of these changes in the consultation process.
Simple questions promote interest in sustainability
The customers' interest in sustainability was greatly increased when the technocratic survey of sustainability preferences required by European law was replaced by a simplified and emotionalized approach. In these cases, 60 instead of only 47 percent of those tested expressed an interest in the sustainability of their investment in the survey before concluding the contract. Of these, in turn, significantly more customers opted for ecologically sustainable investments as defined by the Taxonomy Regulation (89 instead of 54 percent) or for generally sustainable, ESG-compliant investments as defined by the Disclosure Regulation (73 instead of 58 percent).
"Although the simplified and emotional approach in the experiment contradicts the current legal regulations," says Prof. Beenken, "it is understandable for laypeople and taps into the great interest in sustainable solutions among the population much more effectively. The European Union should urgently simplify the regulations, allow questions that can be understood by laypeople and make it mandatory for professionals in the industry to translate sustainability preferences into suitable products in the best possible way."
Default option helps with the decision
Of the four nudging factors, the default option was best suited to steering customers towards the sustainable variant of an annuity insurance offer. The effect was enhanced by combining it with other incentive factors. "However, the formula 'a lot helps a lot' does not apply here, because too much 'nudging' puts customers off again," emphasizes Prof. Linnenbrink. "Overall, we were only able to measure slight but convincing effects of such incentives."
At the same time, the authors note that selling life and pension insurance without counseling does not appear to make sense. "We were only able to simulate small sections of the usual counseling and information process. In reality, counseling would provide customers with much more detailed information and answer their questions," says Prof. Beenken.
According to the authors of the study, there has been a positive development in the population's knowledge about the connection between insurance investment products and sustainability. The proportion of customers who were aware of corresponding advertising or information has increased from 7 to 16 percent (advertising) and from 6 to 14 percent (information) compared to a previous study conducted by Fachhochschule Dortmund in 2023(DOI 10.26205/opus-3336(Opens in a new tab) ). The proportion of customers who received counseling also increased from 3% to 8%.