Managing the risks of energy efficiency insurances in a portfolio context: An actuarial diversification approach

Dennik Baltuttis, Jannick Töppel, Timm Tränkler and Christian Wiethe

International Review of Financial Analysis, 2020, vol. 68, issue C

Abstract: 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.

Keywords: Energy efficiency investment; Energy efficiency insurance; Energy portfolio risk management; Energy portfolio optimization; Risk diversification (search for similar items in EconPapers)
JEL-codes: F37 G11 G22 Q01 Q40 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:68:y:2020:i:c:s1057521918305131

DOI: 10.1016/j.irfa.2019.01.007

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