A recent report by the Swiss Re Institute titled “What goes around comes around: Insuring the circular economy” highlights the challenges faced by the recycling industry in obtaining sufficient insurance cover, which is crucial for the growth of the circular economy.
The report points out that limited insurability poses a threat to the industry’s transition towards sustainability.
The recycling sector’s growth and capacity expansion require adequate insurance coverage, including property insurance and business interruption cover.
However, the industry has historically struggled to secure such insurance, with complaints of high premiums. Nevertheless, the report suggests that the situation is gradually changing.
A significant obstacle to insuring recycling companies is the high risk of fire incidents inherent in recycling processes. The large volumes of easily combustible materials such as paper, textiles, and plastics, coupled with high temperatures and fermentation during storage, contribute to the risk.
Fires can occur at various stages of the recycling process, making them challenging to combat, with many large fires having unknown root causes.
The recycling industry’s insurance premiums are perceived as undifferentiated and exceedingly high, especially for smaller companies with only one or two plants. Despite most recyclers not experiencing significant losses themselves, overall loss ratios are driven by a few major incidents, leading to higher premiums.
Another key challenge is the heterogeneity among recycling plants. Each company, and even plants operated by the same company, differ greatly in their operations, technology, and processes.
This diversity makes it difficult for insurers to apply uniform underwriting rules, leading to some categories of recycling being excluded from coverage altogether.
Furthermore, the absence of consolidated global data on recycling operations adds to the complexities of insurability. Industry classifications are not consistent, and insurers may lack common standards, making it hard for them to accurately assess different recycling risks.
To address these challenges, the report emphasises the importance of collaboration between recycling companies, brokers, and insurers in defining the right coverage. This includes determining an appropriate sum insured to receive sufficient compensation in the event of a full loss and ensuring adequate business interruption cover.
Deductibles can be employed to lower premiums, reduce administrative burdens for smaller claims, and align incentives to prevent losses.
Despite the hurdles, the relationship between recyclers and insurers is often long-term oriented, indicating the potential for finding sustainable solutions to improve insurability within the industry.
The report concludes that addressing the issue of limited insurability is essential for the circular economy’s successful transition, as recycling companies play a pivotal role in building a more sustainable and environmentally responsible future.
