Managing the Risks of Energy Efficiency Insurances in a Portfolio Context : An Actuarial Diversification Approach

Title data

Baltuttis, Dennik ; Töppel, Jannick ; Tränkler, Timm ; Wiethe, Christian:
Managing the Risks of Energy Efficiency Insurances in a Portfolio Context : An Actuarial Diversification Approach.
In: International Review of Financial Analysis. Vol. 68 (2020) . - No. 101313.
ISSN 1057-5219
DOI: https://doi.org/10.1016/j.irfa.2019.01.007

Project information

Abstract in another language

To achieve ambitious international climate goals, an increase of energy efficiency investments is necessary and,
thus, a growing market potential arises. Concomitantly, the relevance of managing the risk of financing and
insuring energy efficiency measures increases continuously. Energy Efficiency Insurances encourage investors by
guaranteeing a predefined energy efficiency performance. However, literature on quantitative analysis of pricing
and diversification effects of such novel insurance solutions is scarce. This paper provides a first approach for the
analysis of diversification potential on three levels: collective risk diversification, cross product line diversification,
and financial hedging. Based on an extensive real-world data set for German residential buildings, the
analysis reveals that underwriting different Energy Efficiency Insurance types and constructing Markowitz
Minimum Variance Portfolios halves overall risk in terms of standard deviation. We evince that Energy Efficiency
Insurances can diversify property insurance portfolios and reduce regulatory capital for insurers under Solvency
II constraints. Moreover, we show that Energy Efficiency Insurances potentially supersede financial market instruments
such as weather derivatives in diversifying property insurance portfolios. In summary, these three
levels of diversification effects constitute an additional benefit for the introduction of Energy Efficiency
Insurances and may positively impact their market development.