Climate Change Insurance Issues
There is now a consensus among the scientific community that the climate is changing, with potential risk to the global economy, ecology, and human health and well-being. But how much of this is due to natural phenomena and how much to the effects of human activity is a matter of debate. Also unknown is the extent to which weather patterns have already been affected. As assumers of risk, insurers seek to mitigate potential losses every day through a process known as risk management. Since climate change could lead to losses on a scale never before experienced, insurers are not waiting for researchers to produce all the answers. A 2009 report by Ceres, a network of companies concerned about global warming, identified some 244 insurance related organizations in 29 countries that were working in 2008 to find solutions to the threat posed by greenhouse gas emissions, up from 190 groups in 26 countries in 2007. Insurers are also redoubling their efforts in the more traditional areas of risk management, including alerting policyholders to the potential for lawsuits for failure to protect against or disclose possible harm to the environment. Meanwhile, society’s concern about climate change offers insurers new avenues for leadership and new opportunities for innovative products.
Global Warming: When fossil fuels—coal, oil and natural gas—are burned to produce energy, so-called greenhouse gases, largely carbon dioxide, are emitted into the atmosphere where they trap heat. Forests and oceans can absorb some of the carbon. But to avoid the most catastrophic effects of what is predicted to occur, researchers say, carbon emissions must be greatly reduced, hence the push to reduce overall energy use, boost the use of energy from renewable sources such as solar heat and curb the use of paper and other products made from trees, which absorb carbon dioxide in the process of photosynthesis. Global warming has the potential to affect most segments of the insurance business, including life insurance if rising temperatures lead to an up-tick in death rates. Property losses of all kinds are most likely to increase, and there is the potential for much higher commercial liability losses if shareholders and consumers try to hold businesses responsible for changes to the environment.
Insurers’ Contribution to Lowering Greenhouse Gases: Insurers, like companies in other industries, are promoting strategies to lower greenhouse gas emissions. Some insurers have been warning public policy leaders and the general public about the threat of climate change for years, and others were among the first to adopt public statements on the environment and climate change and to join business coalitions calling on the federal government to enact legislation to reduce greenhouse gases. Some, particular reinsurers, are sponsoring research and working with others interested in the same kind of solutions, such as finding ways for individuals and society to adapt to extreme weather, particularly in developing countries. Many insurance companies are committed to reducing their own total greenhouse gas emissions and offsetting the remainder through contributions to reforestation and renewable energy projects. They also encourage their employees to adopt “green” policies in their private lives. Some were involved in projects to reduce greenhouse gases even before such efforts gained widespread public attention, and many are now reinforcing their policyholders’ desire to reduce their carbon footprints by offering them paperless billing and documentation. Some have upgraded the quality of their Web sites to encourage policyholders to transact business electronically. At least one auto insurer sells policies exclusively online. Insurers are also working on another front: seeking to reduce the incidence and cost of property damage caused by those events that still occur, despite society’s best efforts to reduce greenhouse gases.
New Products and Business Opportunities: Without insurance, the economy could not function. Insurers essentially enable new products and services to be created by assuming the risk of loss. Just as they quickly adapted existing liability insurance policies for horse-drawn carriages, or teams of horses, to automobiles towards the end of the nineteenth century, so they are responding to climate change initiatives at the beginning of the twenty-first century. Opportunities exist on several fronts. First, there are new risks to insure, including new industries such as wind farms and other alternative fuel facilities, and emerging financial risks such as those involved in carbon trading. Insurance policies related to carbon trading protect those that invest in clean technology projects against the failure of the project to deliver the agreed-upon emission rights. A number of companies are also offering their clients carbon project risk management consulting services. A carbon credit permits the holder to emit one ton of carbon. The Kyoto Protocol and other cap and trade systems now under discussion set ceilings for carbon output and allow those that produce less than the limit to sell credits to those that exceed it. Investors in clean technology projects such as reforestation and renewable energy buy the rights to credits and sell them in the international carbon trading market. Among the risks associated with purchasing carbon trading rights is that the technology/project designed to reduce carbon emissions will not meet expectations or that the company will become insolvent before it is able to fulfill its contract, leaving the investor without the necessary carbon offsets. Second, the need to curb global warming has spurred the creation of insurance policies that provide incentives to policyholders to contribute to these efforts. These include discounts on auto insurance policies for owning a hybrid car and for driving fewer miles and policies for green building construction.
Auto Insurance Initiatives: Motor vehicles account for more than 25 percent of all U.S. greenhouse gas emissions. Insurance policies such as pay-as-you drive, which factors mileage driven into the price of insurance, and hybrid car discounts could reduce that amount by more than 10 percent if broadly implemented, according to Ceres, a network of companies concerned about global warming. A study by the Brookings Institution suggests that if drivers paid by the mile, driving would drop by about 8 percent. There are two ways to reduce the greenhouse gas emissions associated with driving. One is to encourage people to purchase vehicles that emit less carbon dioxide into the environment and get more miles per gallon of gasoline. A number of companies offer discounts to people who drive hybrid vehicles— some believe that people who are socially responsible are also more responsible behind the wheel. The other way is to reward people for driving fewer miles, known as pay-as-you-drive (PAYD) auto insurance. Several insurers have developed technology-based discount programs that provide financial incentives to drive fewer miles. Mileage information comes from a special device. In some, it is linked to the car’s odometer and in others, it is a wireless sensor that can monitor speed as well as mileage. These programs are offered in a growing number of states. In addition, California and several other states are encouraging the development of PAYD programs. Insurers are helping to promote sustainable building practices by offering green homeowners and commercial property policies. In addition, they are responding to the growing demand for assistance with energy and emissions reduction projects with risk management services that address global warming.
“Green” Building Insurance Coverage: Increasingly, homeowners at the leading edge of the environmental sustainability movement are generating their own geothermal, solar or wind power and selling any surplus energy back to the local power grid. Several insurers are supporting this trend by offering a homeowners policy that covers both the income lost when there is a power outage from a covered peril and the extra expense to the homeowner of buying electricity from another source. Policies generally cover the cost of getting back online, such as utility charges for inspection and reconnection. Some insurers offer homeowners insurance policies that, in the event of a fire or other disaster, allow policyholders to rebuild to environmentally responsible “green” standards, even if they had not purchased such a policy originally. Green standards, part of the sustainability movement, include energy conservation benchmarks and the use of renewable construction materials. The Green Building Council introduced its Leadership in Energy and Environmental Design (LEED) certification program in 2001. According to Ceres, buildings account for more than one-third of greenhouse gas emissions and green building practices can reduce energy use and emissions by more than 50 percent. With green commercial building construction expected to rise significantly over the next few years, a growing number of insurers are offering green commercial property insurance policies and endorsements, some of which are directed at specific segments of the business community such as manufacturers. The first green commercial policy was introduced in 2006. In general, the policies allow building owners to replace damaged buildings, whether or not they are already certified green, with green alternatives including energy efficient electrical equipment and interior lighting, water conserving plumbing, and non-toxic and low odor paints and carpeting. They also may pay for engineering inspections of heating, ventilation, air conditioning systems, building recertification fees, the replacement of vegetative or plant-covered roofs and debris recycling. Some cover the income lost and costs incurred when alternative energy generating equipment is damaged.