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Insurance Industry Puts Premium on Green Building

Commercial insurers are offering green building credits and incentives for investing in renewable energy, while opting not to renew policies with global-warming risks. Are they doing it to tackle the causes of rising weather-related losses, or are they using climate change as a way to raise their rates and dump their most risky customers?

Insurance companies are taking steps to help prevent catastrophic commercial losses related to climate change. (Joseph Nickischer photo)

"Global warming is upon us, and it poses unprecedented new threats to the insurance industry and vast segments of society that rely on insurance for peace of mind and financial security." Thus begins a report issued recently by Ceres, an organization of major investors, most of whom have an equity stake in the lucrative insurance industry.

Insurance companies saw their losses rise sharply due to last year's tragic hurricane season, but it was part of a trend that started in the 1980s. More severe storms, forest fires, and rising sea levels could mean catastrophic losses for decades to come. The Ceres report shows that investors are concerned about the impact of climate change on their insurance investments.

"Record insured losses, rating downgrades, coverage pullbacks and class-action lawsuits are just a few of the reverberations that have been felt across the industry," writes Ceres's president. Those losses (as a percentage of the industry's US $3 trillion in revenue) shot from the low single digits to the low double digits in one year. That's turning the insurance industry into believers in global warming.

In response, a few insurers are starting to use their economic muscle to support green buildings, hybrid cars and other strategies to reduce greenhouse emissions. Insurers could also influence where businesses locate.

The Ceres report cites 190 examples of new insurance products available in 16 countries. Half of the examples are in the U.S., although Europe started earlier and has been taking similar actions in recent years.

Alternative energy insurance

"We have a policy that we're introducing for certified green buildings," said Steven Bushnell, Product Director for Commercial Business for Fireman's Fund. "We have redefined what we're covering for a building... for things like the alternative energy systems, to the point where we will cover business income losses. If there's a fire and the building has been selling energy back into the grid, we will pay for that loss of income." The new policy will also cover the additional cost of buying power from the grid while the alternative energy system is under repair, Bushnell said.

Green buildings get rate credits and upgrades

The policy also encourages green rebuilding after a total loss of a building. The Fireman's Fund Green Building Replacement, Green Upgrade, and Commissioning coverages tell commercial property owners to rebuild and replace with green alternatives such as Energy Star-rated electrical equipment, LEED-compliant interior lighting systems, and commissioning -- engineering inspections of systems such as HVAC to ensure that they function efficiently.

If there's a fire and the building has been selling [renewable] energy back into the grid, we will pay for that loss of income.
--Steven Bushnell, Fireman's Fund.

Boards get education on climate-related liability

Insurance companies may be taking these steps on the pretext of preventing climate change, but they're also taking less publicized steps to avert liability-related losses. That includes avoiding lawsuits related to business responsibility for global warming.

"In January, Marsh, the largest insurance broker in the US, will offer a program with Yale University to teach corporate board members about their fiduciary responsibility to manage exposure to climate change," writes the Christian Science Monitor in their article "New combatant against global warming: insurance industry."

Homeowners get quite a different treatment

These rate breaks and coverages do not apply to residential customers. Fireman's says it is because the green building movement has largely been confined to commercial buildings, and USGBC took longer to adapt LEED to residential structures. Bushnell said they "are studying that and hope to have something by the beginning of 2007."

Actually, many homeowners are seeing rate increases and policy terminations. Insurance companies have been raising rates, especially in coastal areas at great risk of catastrophic storms, or even pulling back coverage.

"Some consumers are already noticing a negative effect of this shift," says CSM. In the past year, "homeowners living in a zone that an insurer considers a high storm risk in an era of climate change have seen their policies cancelled or not renewed. This includes coastal areas stretching from Texas to New York."

Ceres quantifies the impact of the pull-backs: "In Louisiana and Florida alone, more than 600,000 homeowners' property policies have been cancelled or not renewed in the past year. In Massachusetts and New York, private insurers have cancelled coverage for more than 80,000 coastal homeowners the past two years, even though it has been decades since the last major hurricane hit the region."

Bob Hunter, Director of Insurance at the Consumer Federation of America, calls it an overreaction and is skeptical that the actions are founded in any real analysis of climate-related risks. He cites record insurance industry net profits in recent years.

"The hypocrisy is this," Hunter said. "The insurance industry after Hurricane Andrew said they would start to use models that look 10,000 years into the future, where you could actually factor in global warming. But this year they went back to one- to five-year models, where you can't."

Strange bedfellows

Farmer's is a subsidiary of Allianz Group, one of the world's largest insurance providers. Allianz issued its own study, "Climate Change and Insurance: An Agenda for Action in the United States," last month in conjunction with the World Wildlife Fund (WWF), a leading conservation organization.

"The insurance industry has a vested interest in stepping up to the plate and being a part of the solution" Carter Roberts, president of WWF-US, told Clean Edge News for a related story. "Allianz has been a leader on this issue and we hope that the entire industry makes climate change a top priority."

Allianz says it is investing $600 million in renewable energy projects over the next five years, introducing a new tool based on Google Earth to help customers better manage their exposure to natural catastrophes, and cutting its own greenhouse gas emission by 20 percent by 2012.

Related online:
"From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change" Ceres report
"Risky Business" Sustainable Industries Journal article

Other sources include a Fireman's Fund press release. Steven Bushnell and Bob Hunter made their remarks in an interview with KCRW radio: "Risk Assessment, Climate Change and Insurance Rates"

Ceres is a national network of investment funds, environmental organizations and other public interest groups working to advance environmental stewardship on the part of businesses.


Greenwashing stunt for Fireman's Fund, to distract attention from brutal rate hikes. They are doing so little that is green and other insurance companies are doing parctically nothing. Even in Europe there is more talk than real action.