Repair over replace? Insuring the Circular Economy
The circular economy will involve a significant transition in the way we produce, use and consume goods.
As clients adapt their business models to align with their sustainability and net-zero ambitions and regulatory requirements, insurers will need to respond in a way that’s aligned to their own risk appetites, sustainability and corporate strategy. This will require close collaboration with customers, suppliers, regulators, industry and sector initiatives and data providers across the insurance value chain.
To understand what a circular economy is, how it works and how it creates a better future for business and society, take a listen to our Green Room podcast. The 2023 UK Circularity Gap Report developed by Circle Economy in collaboration with Deloitte provides a snapshot of the UK economy, showing that it is only 7.5% circular and explores the benefits, application and opportunities for UK businesses to embrace circularity.
For the insurance industry, we have identified three ways to succeed across the disruptive change brought by the circular economy:
- Adapt existing products
- Invest in circular business models
- Innovate offerings to capture new business models
1. Adapt - existing products and claims handling arrangements to incorporate circular economy
Insurers can adapt existing product offerings and support their clients at different levels to integrate circularity principles, including working with suppliers to use recycled parts for repairs (‘repair over replace’) and encouraging the recycling of goods that would traditionally have a one-time use.
There are several examples of this already across the industry:
- RSA work with suppliers to encourage a ‘repair over replace’ philosophy by recommending sustainable claims solutions for customers to consider.
- Tokio Marine & Nichido promotes the use of recycled automobile parts for personal motor insurance customers for any repairs and replacements.
- Esure are working with suppliers to maximise use of recycled parts. During 2021 it replaced 3.74 parts per repair, compared to industry average of 6.73. 
Increasing use of recycled parts can not only help reduce claims servicing costs, but it can also help firms meet their own net-zero targets by reducing carbon emissions in their supply chains. Esure’s use of recycled parts, for example, led to an estimated saving of 79,000kg g CO2e.
2. Invest - finance and invest in innovative and circular business models
With £1.8 trillion assets under management, the UK insurance industry will be vital in managing and directing capital towards sustainable activity. Insurers have the means to drive engagement above and beyond their transitional ecosystem to deploy capital to support projects aligned with a circular economy. Inflation, the cost-of-living crisis and national net zero targets have made firms and sectors with circular economy business models more appealing to investors. The revenue generated through the circular economy transactions was over $339 billion in 2022 and is expected to double by 2026. French second-hand electronics platform Backmarket, for example, is currently France’s most valuable private company, valued at £4.7 bn.
While insurers may not want to directly invest in new consumer tech platforms such as Circos, or in peer-to-peer marketplaces like Depop or Vinted, they can engage their asset managers to identify and invest in specific funds such as Circularity Capital or Closed Loop Partners which both focus on investing in growing companies in the circular economy.
3. Innovate - develop new insurance products to support circular economy businesses.
Circular production methods and shifts towards more durable materials with a focus on repair and reuse will impact claims profiles and product liability exposures. Traditional online marketplaces have begun to refurbish their previously sold products and provide warranties to cover them. Insurers can work with corporate clients to develop warranty and risk management solutions that could mitigate concerns about increased liability due to changing ownership models, thereby facilitating growth of these business models. Examples include:
- Apple launched its Apple Certified Refurbished product line.
- eBay partnered with Allstate Protection Plans to include a warranty for up to two years for every eBay Refurbished product.
- HP developed the HP Renew Program which offers HP-certified quality products with an equivalent HP base warranty as with its new products.
There is also a rise in leasing and usage-based business models and the sharing economy, epitomised by Uber and AirBnB, shifting ownership from consumers to manufacturers, thereby creating opportunities for warranty or usage-based insurance products. Swedish insurance fintech Omocon developed a microinsurance product for hire goods, ranging from tools and hardware to houses and vehicles. The product is integrated into existing digital sharing platforms and insurance can be calculated on an individual transaction basis or “all-in” basis.. Qover has developed an “insurance-as-a-service” business model to offer a personalised digital insurance product targeting companies in the sharing economy. 
By developing an overarching circular economy approach that involves adapting existing products, investing in the circular economy and innovating existing products to capture changing business models, insurers can both future-proof their corporate strategies and help achieve their own sustainability and net zero ambition.
Three next steps for the industry to consider are:
- Engage and educate senior management on the benefits of the circular economy, including the potential to support delivery of existing sustainability or ESG strategies and decarbonisation targets and wider corporate strategy.
- Engage with stakeholders in the value chain, including key suppliers, on how circular economy approaches could be integrated into the delivery of products and services.
- Review the claims handling processes to identify key processes that could benefit from adapting circular economy principles
 Building resilience through responsible business | RSA Insurance
 Environmental Initiatives | Tokio Marine Holdings, Inc. (tokiomarinehd.com)
 22_climate-wise-disclosure-documentv2.pdf (esuregroup.com)
 22_climate-wise-disclosure-documentv2.pdf (esuregroup.com)
 Insurers as investors | ABI
 Circular economy revenue worldwide 2022-2026 | Statista
 Back Market becomes France's most valuable startup | Sifted
 All examples of the circular economy in fashion (ellenmacarthurfoundation.org)
 Why Refurbished - Apple (UK)
 eBay Refurbished Warranty
 Reasons to buy HP Renew products : HP Renew Program - Europe, Middle East and Africa | HP® United Kingdom
 Creating trust in the sharing economy: Omocom (ellenmacarthurfoundation.org)