A Ceres study, “From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change,” written by Evan Mills and Eugene Lecomte and published in August this year, notes that insurers in 15 countries have been developing over 190 methods to reduce risks related to global warming and climate change. These strategies represent significant opportunities for the industry which is experiencing increasing losses from climate change impacts.

Insurance is the largest industry globally, with annual premium revenues at $3.4 trillion and $1 trillion in investment income. But the growth rate of premiums is far outstripped by the industry’s weather-related catastrophe losses, which reached nearly $80 billion in 2005 alone – and these numbers are underestimated due to minimum reporting levels. As well, the numbers do not include uninsured losses. Future years’ projections are no better: there is a 44% expected increase each year in Europe’s winter storm economic losses stemming from climate change. And, climate modelers note that of the anticipated $10 billion in future annual losses due to Atlantic hurricanes alone, up to $1.8 billion a year can be due to climate change.

Hurricane Katrina’s toll included $45 billion in insured losses. Impacts have broadened: property policies of over 600,000 homeowners were either not renewed or cancelled in its wake, and many of those still insured faced 20% - 40% increases (and some up to 500%). Individuals and companies are increasingly concerned about loss reduction. These insurance risk mitigation measures are spreading to coastal regions potentially subject to storm losses. Some examples: Allstate, homeowner insurance provider with a 25% market share in the New York metropolitan area, will not insure new policies on Long Island or in New York City, and has cancelled 28,000 policies and not renewed about 30,000 due to hurricane risk in New York – meanwhile hurricanes haven’t hit these locales in 70 years.^{i ii}

Given the magnitude of losses and the underlying threat posed by climate change to the industry, insurers have had to address these concerns. The authors note that the U.S. Department of Energy identified 80 building strategies that: “can lower greenhouse gas emissions while reducing the direct risk of property damage from mechanical equipment breakdown, professional liability, builders’ risk, business interruption, and occupational health and safety.” ⁱⁱⁱAdditional methods of addressing insurance risk potential include creating products that drive climate change mitigation, reduce loss risks and augment premium income at the same time.

Innovative Insurance Products

Energy Savings Insurance

This offering protects against underperformance by an energy efficiency project compared to anticipated energy savings, and has an estimated $1 billion annual U.S. insurance premium potential.^iv

Renewable Energy Project Insurance

The Ceres study portrays results of a Marsh survey in which cumulative availability of insurance products for renewable energy technologies was measured. Included were insurance coverage rates for: Construction/Erection All Risks; Start-Up Delay/Advanced Loss of Profits; Property Damage; Business Interruption (BI)/Contingent BI; Machinery Breakdown; Operators Extra Expense; Marine Transits; and Political Risks.^vThis segment also represents significant market potential given the global market for renewables is expected to grow from $40 billion in 2005 to $150 billion, in 10 years.^vi

Green-Buildings Insurance

Some of the strategies that Fireman’s Fund will be introducing in 2006 include:

• Conventional Property with loss coverage that has been subject to damage or destruction, replaced by property that is green and/or energy efficient

• Funding commissioning for repairs of loss to a building

• Certified green building insurance premium credits

This insurer’s risk perception is that vulnerability to future losses is mitigated by these features.

Another key source of perceived insurance risk mitigation is mold risk-management strategies which also can augment energy efficiency. This new perspective on the efficacy of such risk reduction measures has meant some insurers will now insure against mold, and this has additional market growth potential.^vii

Climate Risk Management Services

Insurance broker Marsh, among whose client base are 75 percent of companies in the Fortune 500, is providing advice to its clients on addressing climate risks and opportunities.

The "Halo Effect"^viii

Insurers are beginning to credit implementers of technologies that reduce the impacts of climate change, as presenting lower risk.

Travelers, as of 2006, gives a premium credit of10 percent to owners of hybrid vehicles. DPIC, architects’ and engineers’ professional liability insurer is offering a 10 percent credit on premiums for architects and engineers obtaining training in commissioning.

These and other measures are opportunities for changing the market outlook within the insurance industry.

Chris Walker of Swiss Re … notes that energy giant Exxon Mobil accounts for roughtly 1 percent of global emissions and has aggressively lobbied against any efforts to reduce greenhouse gases. "So," said Walker, "we might go to them and say 'Since you don’t think climate change is a problem, we’re sure you won’t mind if we exclude climate-related lawsuits and penalties from your [Directors & Officers} insurance.'"
Swiss Re, as quoted by Eugene Linden (2006) ^ix

"We expect climate change not only to produce extreme capital damaging events, but also to increase uncertainty around corporate business plans and potentially reduce asset values. … We also see industry players having increased opportunity to use their influence as investors, in order to encourage responsible and climate proof behaviour from the boards of corporations in which they invest, and with which they do business."

Lloyds of London (2006)^x

Readers can download the report via the Ceres website: http://www.ceres.org/pub/or Lawrence Berkeley National Laboratory http://eetd.lbl.gov/EMills/PUBS/PDF/Ceres_Insurance_Climate_Report_090106.pdf

More information on the insurance-related research under way at Lawrence Berkeley National Laboratory can be found here: http://eetd.lbl.gov/insurance

Sonja Persram, BSc. MBA, is author of Green Buildings: A Strategic Analysis of North American Markets for Frost & Sullivan (in press), addressing Energy, Water and Facilities Management. She is a member of the City of Toronto’s Green Development Standards Working Group. Contact: Sustainable Alternatives Consulting Inc: sonja@sustainablealternatives.ca