Hidden obstacles for the circular economy; lack of insurance for the recycling industry

The circular transformation that many companies are already committed to will rely on increasing levels of recycled materials. A new white paper published today in collaboration with Ingka Group, together with Ikano Group, BCG, and international insurance companies Swiss Re and AXA, highlights an obstacle to this process.  

An industry with a critical role to play in achieving a circular economy is the recycling business. However, the recycling business is difficult to insure, which could threaten the industry’s growth in the future. As the paper ‘What goes around comes around: insuring the recycling economy’ explains, the recycling industry has traditionally had a poor record with fire hazards, given the nature of the materials it works with. These large losses have resulted in limited insurance coverage and high premiums for recyclers.  

The paper explores the role the insurance industry needs to play in providing more support to companies, ultimately aiming to lead to industry-wide changes, support business and new companies’ circular transformation. 

The report outlines the challenges being faced by recycling companies as many large corporations are now starting to focus on the recycling sector, where they are seeking to achieve sustainability goals through commitments to circularity and investments in the industry. But growth in recycling capacity, both to protect investors and operating companies, requires sufficient insurance cover, including property insurance and business interruption cover. Acquiring such insurance in the sector has historically not always been easy, with complaints of too high premiums.   

Alena Farkova, Corporate Partnership Client Manager at Swiss Re, said: “In collaboration with AXA and Ingka, supported by BCG, Swiss Re has explored the insurability challenges faced by the recycling industry, examining it from the recycling, investor and re/insurance industry point of view. Currently, the asset protection of recycling companies is broadly inadequate, driving the limited re/insurance capacity, limited coverage and high insurance prices. We believe closer collaboration and increased transparency on adequate protection measures could help in addressing this issue, supporting the growth of circular business models”. 

As part of its climate commitments, IKEA is committed to becoming a circular business by 2030 and it wants to play its part in making the circular economy a reality. IKEA aims to design all products with circular capabilities from the very beginning to be reused, refurbished, remanufactured, and eventually recycled, by applying circular product design principles in the product development process. It aims to use only renewable or recycled materials by adapting, finding new sources, and developing new materials. 

As the largest IKEA retailer, Ingka Group is exploring how it can best contribute to this shift, including enabling its customers to take part in more circular practices, and collaborating with stakeholders, including government policy makers to support policies that promote the transition to a circular economy, where the ambition is that resources are continually reused, regenerated, and eventually recycled. 

Key conclusions from White Paper include:   

• Linear business models are not sustainable, and we must change: We will consume 2.3 times the earth’s resources by 2040 based on our current path of linear consumption. Recycling enables transition from a linear to a circular economy and increasing global recycling rates to 80-90% by 2040 will be key to rationalizing the use of the planet’s resources.   
• Recycling could expand significantly in the next 20 years: We see large companies committing to circularity goals, which will drive demand for recycled materials. Such commitments are supported by emerging legislation that mandates recycling. Increasing recycling rates will require capital inflow estimated at around USD 2 trillion by 2040.    
• However, growth in recycling could be threatened by limited insurability due to negative past experience: Insurance capacity for property coverage is constrained due to a spate of large loss fire incidents caused by the high combustibility and unpredictability of recycled materials. These large losses have resulted in limited coverage and high premiums for recyclers.    
• Awareness of necessary risk management practice must improve and be addressed (early on): A myopic approach ignoring best practices in risk management should change. Recyclers and investors remain largely focused on complying with the minimum legislative requirements, despite more comprehensive risk management guidance from the insurance industry.   
• Financing of appropriate preventive measures is also lacking: The recycling industry is currently dominated by micro to mid-sized companies that struggle to finance expensive risk management measures, often not planned at the onset. Costs of protective measures must reflect in recycling prices – and ultimately be absorbed across the economy.   

• Insurance risk engineering surveys and constant monitoring are often resource intensive: (Re)insurers require in-depth and regular property assessments of recycling facilities given the past loss experiences, which drives insurance costs up even more. Nonetheless, such assessments will remain essential to develop and maintain the insurability and operability of recycling assets.     
• Close stakeholder collaboration alongside improved risk understanding can drive insurability and enable growth: Strong collaborations and partnerships in risk management can prevent large losses and enable appropriate protection, improving the risk quality of the recycling industry as a whole.   

The report and more information can be found here at Swiss RE website. 

About Ingka Group
With IKEA retail operations on 31 markets, Ingka Group is the largest IKEA retailer and represents about 90% of IKEA retail sales. It is a strategic partner to develop and innovate the IKEA business and help define common IKEA strategies. Ingka Group owns and operates IKEA sales channels under franchise agreements with Inter IKEA Systems B.V. It has three business areas: IKEA Retail, Ingka Investments and Ingka Centres. Read more on Ingka.com