In Focus: Bumps in the road ahead for environmentally-friendly motor policies

In a world where concerns over the environment have commanded more and more attention, it is no surprise that insurers are beginning to implement green offerings within their propositions.

This is especially true when it comes to the motor sector, with several firms tailoring their policies to reward drivers based on how their driving behaviour impacts on the environment.

There have been new players in the market to help provide drivers with such policies. For example, Zixty was launched in 2022 and provides short-term car insurance policies with free carbon offsetting.

And The Green Insurer, launched in December 2023, said it aimed to become the “most competitive [option] for drivers doing low annual mileage” and would work to encourage insureds to reduce carbon emissions and drive in an environmentally-friendly way.

As part of the broker’s offering, customers’ policies are also linked to a mobile app that monitors their driving behaviour.

Each mile driven by customers will have its equivalent emissions offset via a range of carbon offsetting projects.

Paul Baxter, chief executive at The Green Insurer, told Insurance Times that insurance firms were “coming under pressure” to do something about the environment and to show how they were looking at reducing emissions.

And he felt insurers were becoming more interested in such policies for the motor market given telematics solutions would be adopted by a broader range of drivers – and reduce risk in turn.

“They like it from a risk angle – with people driving and wanting to offset their emissions as well as be monitored and use telematics, that is a good thing,” Baxter added.

“You are getting telematics into the hands of standard drivers as well as young drivers.”

Price rises

However, Andrew Brown-Allan, executive vice president of EMEA growth for telematics provider IMS, said that with motor premiums in general “being difficult to stomach”, such environmentally-friendly policies currently may only make up a small amount of the sales on an insurer’s book.

According to data published by Confused.com and WTW earlier this month (16 January 2024), prices surged by 58% in the last 12 months, with UK motorists now paying £995 on average for premiums.

The data also revealed premiums had now risen for nine consecutive quarters since Q4 2021, with the final quarter of 2023 recording an average price rise of 8% (£71).

The rise came as a result of economic headwinds, with the cost of spare parts and materials, as well as repairs becoming more expensive due to inflation, labour shortages and cars becoming more sophisticated.

Baxter said that it was currently a “big challenge” for insurers to offer “decent prices” on environmentally-friendly motor policies.

And Brown-Allan felt that under the current circumstances, “a reputable insurer offering a low premium will win out over someone that is offering a product that offsets carbon” – especially on a price comparison website (PCW).

“It is going to be a case that in a PCW dominated market, it is always going to mean that the majority are gravitating towards the insurer that offers the lowest premium,” he added.

This is particularly the case for electric vehicle (EV) drivers also looking to buy an eco-friendly policy, according to Novo Insurance director James Allenby.

Back in October 2023, Confused.com highlighted that the cost of insuring an EV was currently “a lot” higher than for petrol or diesel powered cars and that there was “no real sign of this changing”.

Its data showed that EV drivers saw an increase in premiums of 72%, while for drivers with internal combustion engine (ICE) vehicles, the rise was 29%.

“My perception of it is that the EV driver feels like they are being targeted by the fact they are driving an EV,” Allenby said.

“The motor market is in a state of flux anyway, so all policies are increasing significantly.”

Visibility

Another potential barrier to the uptake of environmentally-friendly policies is an issue around visibility.

For example, Brown-Allan highlighted that, with the motor insurance market dominated by PCW’s, it could be difficult for new entrants to create a proposition that stood out.

“In a distribution market led by PCW’s where you might only have 160 characters to articulate a proposition in the quote list, it is really difficult,” he said.

“People that are actively seeking out that kind of proposition will find them, but I suspect that they are in a very significant minority.

“Propositions that have an element of carbon offsetting or are geared towards the more environmentally conscious consumer may actually be difficult to spot. You’re not going to have a great deal of opportunity to articulate your point of difference.”

In turn, he felt it was key for insurers to stress in their propositions that driving more safely could minimise their impact on the environment.

”For example, the less loud you are on the gas pedal, the less risk you are creating for yourself in terms of accidents, while you are also lowering emissions,” he said.

”For me, it is layering that benefit, particularly into telematics products where firms can give feedback.”

Baxter also highlighted that the insurance industry “wasn’t exactly famous for nicely worded policy books”, which could, in turn, make some environmentally-friendly policies difficult to understand.

As a result, he said The Green Insurer was focusing on using “everyday language” to make policies easier to understand.

“We will go down a common policy wording, so we’ll get all insurers to sign up to our wording,” Baxter said.

Future growth?

Despite its challenges around price and visibility, Baxter highlighted that, when the firm was in the top five companies listed by a PCW following a search, there were consumers who would click through to its offering.

According to data published by Consumer Intelligence in October 2022, some 77% of Brits noted that they wanted their insurer to be more environmentally friendly, with 23% being prepared to pay something extra for a car insurance policy that was tangibly environmentally friendly.

“[Consumers may see] it is maybe £10 more expensive, for example, but they know they are getting carbon offsets and rewards,” he said.

“And if they can get a discount at renewal for driving nicely, then people are willing to do that. Consumers are going to push for it, so it is definitely going to become a more competitive market.”

Brown-Allan felt the market for environmentally-friendly policies would grow with environmental, social and governance (ESG) becoming a key part of insurers’ strategies.

“This does feel like a good way they can show, within their sustainability reports, that they are making an effort and are contributing to ESG targets,” he added.

“So, I do see new propositions coming to the market – what remains to be seen is how popular they will become.”