Green’s Meager Harvest

Green is supposed to be far more lush for the insuranceindustry—so it seemed several years ago.

Communities across the country modified building codes,requiring new construction and major renovations to be more energyefficient. Many project owners took green building even further andobtained formal green certification for their structures. Insurersfound that owners of green buildings were safer risks and gave themrate discounts. Insurers also offered owners of traditionalconstruction the coverage option to rebuild green after a loss.

At the same time, alternative energy companies were popping upand needing all kinds of insurance.

In the mid-2000s it looked like not only a developing greeninsurance market opportunity for producers and insurers but also aquickly sprouting one.

And then—not so much.

Two years ago, insurance market executives lowered theirexpectations for growth in this area. They were certain theinsurance industry would benefit from it eventually. After all,experts reasoned, the greening of buildings and the emergence ofalternative energy companies were trends that would not reversethemselves, though worldwide economic challenges were slowing themdown.

Today, market results and expectations of executives are muchthe same: Green business has not been what it can be, but marketexecutives predict the ground is prepared for a bumper crop ofbusiness.

Stable market

By 2009, insurers had introduced more than 600 green commercialand personal lines insurance products, and the number was growing,according to Ceres (ceres.org), a coalition of investors and groupsthat focus on sustainability.

Ceres has not formally reviewed the number of product offeringssince then, but insurers are not reporting any productwithdrawals.

“I haven't seen new carriers getting into thismarket the last few years,” said Dwight Stuckey, president andco-founder of MGA Stuckey & Co. of Lake St. Louis, Mo.

The MGA places various property-casualty coverages, includingprofessional and executive management liability insurance, and itsclients include alternative energy companies.

The products are not substantially different, either, said FayeBlizzard, assistant vice president and client executive atAlexandria, Va.-based Rutherfoord, a Marsh & McLennan AgencyLLC company.

However, she noted, some insurers have refined their greenproperty endorsements not only for their policyholders' benefitsbut also to make doing business easier for the insurer.

Fireman's Fund Insurance Co., a subsidiary of Allianz Group,modified its commercial lines property insurance form in 2010 bycombining four separate endorsements that had provided differentgreen coverages into one endorsement, said Stephen Bushnell, seniordirector of product development in Novato, Calif.

At first, Fireman's Fund experienced supercharged growth in itsgreen building-related business. It went from no green business in2006, when it introduced its commercial lines product, to $100million of premium by the end of 2007. Then the competition began.For the last 2 or 3 years, the insurer's commercial propertypremium related to green construction has settled at around $150million, Bushnell said.

One green coverage offered by numerous insurers is a commercialproperty endorsement that covers the owner of a conventionallybuilt structure for the cost of repairing or rebuilding thestructure green in the event of a loss.

It's the economy

But the weak economy has cinched the purse strings of buildingowners, market observers said.

Many insurers include a nominal amount of coverage, such as$25,000, to cover the cost of some green materials, such as paint,drywall and carpeting with low levels of volatile organiccompounds, market executives said.

But because rebuilding green is more expensivethan conventional construction, insurers charge more for anendorsement that provides substantial limits. That additionalpremium can range from 1 percent to 5 percent of the base premium,said Susan Stead, a vice president and principal at Bellevue,Wash.-based Parker, Smith & Feek Inc., one of the nation's top100 brokers.

Stead said many of her clients, which are based in the Northwestand on the West Coast, like the option of rebuilding green if theirstandard construction properties are damaged, but most are “not willing to spend a lot more” for the coverage. “They'll takethrow-in insurance to rebuild green, but they won't pay more forthe coverage” in a weak economy that has left building owners withlower occupancy rates.

For many buyers, there just is not enough incentive—whether itis inexpensive insurance, a tax break or ultimate energy savings—torebuild green, said Marie A. Subacz, a senior vice president andclient executive at Rutherfoord.

“From our perspective, (green) does seem to have lost itsglamour,” said Katie Wilson, vice president-package and generalliability underwriting at CNA Financial Corp. in Chicago.

Of course, owners of properties that were built green typicallywant to rebuild to the same standard after a loss, marketexecutives said. And they can find better coverage deals thanowners of conventionally built properties.

For buildings that obtain a Leadership in Energy andEnvironmental Design (LEED) certification from the U.S. GreenBuilding Council, Fireman's Fund discounts its property insurancepremium 5 percent, Bushnell said. It began giving buildings withEnergy Star-rated systems and equipment the same discount in2010.

The insurer has determined those buildings are better risks thanstandard construction. Not only do the construction materialsand the various building systems make the property safer, butbuilding owners committed to energy efficiency tend to be moreproactive than owners of traditional construction in protectingtheir property, Bushnell said.

Fireman's Fund has determined that loss ratios for greenbuildings are 15 to 20 points lower compared with those forstandard construction, Bushnell said.

But construction is sharply down from its 2005 peak. At year-end2011, construction spending was at a seasonally adjusted rate of$816.4 billion, up 4.3 percent from 2010 but still 46.3 percentlower than in 2005, according to the Census Bureau.

Subacz said that among her construction clients, about 40percent to 50 percent have started projects that will seek LEEDcertification—about the same or somewhat more than before theeconomy crashed in 2008.

Other issues

While the economy is the biggest obstacle to a burgeoning greeninsurance market, additional factors have not helped.

Some observers say that a segment of producers personally linkedgreen insurance products to the global warming debate and did notgive either much credence.

That mindset was such a concern for CNA that it developed aneducation program designed to build support among agents andbrokers placing coverage for commercial construction contractorsworking on renewable energy projects. CNA built that book ofbusiness in large measure because of the program, Wilsonexplained.

Others say producer mindset is not an issue now, if it everwas.

Lindene Patton, the Washington, D.C.-based chief climateproduct officer for Zurich Insurance Group Ltd., said he does notsee resistance from producers.

In his MGA business, which involves local small agents and someof the nation's top 100 producers, Stuckey does not detectproducers giving green coverages short shrift. “Most agents thesedays are looking for new products to sell,” he said. “They'relooking to differentiate themselves in this marketplace.”

But Skip Rawstron, a risk consultant who recently joined FullerInsurance Agency in Chino Hills, Calif., as a real estate insurancespecialist, disagrees.

“I think they're still dragging their feet,” Rawstron said.“It's perceived as a window-dressing type coverage.”

Plus, building owners typically do not closely examine policylanguage or ask about available green building endorsement options,Rawstron said. Brokers and agents have to point that out toinsurance buyers, but some do not, he said.

“In California, I think that's a real big mistake,” he said.Producers should examine local building codes for requirements onrebuilding green.

For example, many codes now contain provisions requiring onsiterecycling of building debris and acquiring raw building materialsfrom suppliers located as close to the project site as possible.Those costs are not covered by traditional property policies butoften are available by endorsement, he said.

Green buds

Even though green insurance has not taken root quite asexpected, insurers are eyeing various green risk coverageopportunities.

Besides its Better Green builders risk endorsement (offsets somecosts involved in upgrading, rebuilding or repairing structuresaccording to LEED or Green Globe standards) and its Green Edgeproperty coverage endorsement (provides an independent limit torebuild damaged real or personal property according to existinggreen standards), Zurich is offering or considering other coveragesthat the U.S. market is not ready for yet but other marketsare.

Overseas, Zurich rolled out an electric car insurance policythat promises road rescues within an hour when cars lose theircharge. The insurer also steers damaged vehicles to repair shopsthat specialize in electric cars and, whenever possible, providespolicyholders with electric car loaners. Foreign markets hold morepromise for the coverage now because their electric carinfrastructures are more advanced, Patton explained.

Meanwhile, although Zurich's carbon capture and sequestration(CCS) liability coverage has not moved to full-scale marketdeployment in the U.S. since its 2009 introduction, Zurich hasdiscussed with public policy makers in the European Union andChina over possible opportunities for selling the coverage there,Patton said.

The CCS policy would respond if greenhouse gases escape intothe environment as coal-fired power plants attempt to sequester theemissions into the ground. After the policy was introduced, therehave been discussions about either shutting down U.S.coal-powered plants or converting them to natural gas-poweredfacilities.

And within the past year, Zurich has integrated itsenvironmental mismanagement coverage endorsement into its directorsand officers liability policy.

The coverage provided in the endorsement, which Zurich initiallyoffered in 2009, “just became expected” by policyholders asshareholders increasingly inquired about climate, natural resourceand environmental issues, Patton said. It covers securities,employment practices and insured-person misrepresentation claimsrelating to climate change and global warming.

The Chubb Group of Insurance Cos. established a formal approachto providing all types of property-casualty coverages to cleantechnology business: companies involved in deriving power fromrenewable resources, creating energy efficiencies or addressing thescarcity of natural resources.

During the first quarter of 2012, Chubb's policyholder count inthis segment grew 25 percent compared with the same period lastyear, said Tampa, Fla.-based Amy Ingram, vice president, worldwideclean tech segment manager.

Most of the insurer's new accounts are small and mid-sizedcompanies, “which are very appealing to Chubb and independentagents,” she said.

Yet those accounts have national and eveninternational reach, largely because of the increasing private andcorporate investment in this area, Ingram said.

Investment in clean technology in 2011 totaled $260 billion, a 5percent increase from 2010 and nearly a fivefold increase from2004, according to Bloomberg New Energy Finance.

Among the key factors driving that investment is governmentcommitment to renewal energy resource consumption, Ingramsaid.

She noted that the governments in 29 states, the Districtof Columbia and Puerto Rico have adopted renewable energyconsumption standards, known as renewable portfoliostandards.

Among the strongest is New York's, which aims to more thandouble the state's use of energy from renewable resources to 29percent of all the energy it consumes by 2015, Ingram said.Similarly, California plans on increasing its renewable energyconsumption rate to 33 percent of total energy used in 2020 from20.6 percent currently, she said.

Plus, by 2030, the world's energy demand is expected to increase40 percent, Ingram said, which would be equivalent to the energydemands of the U.S. and China combined.

Although green coverages are not yet flourishing in theinsurance market, there are some buds and the fruit from thegreening of America eventually will be within reach for allproducers and insurers to harvest, experts say.

Although CNA's alternative energy construction focus has notbeen as lucrative as the insurer hoped, Wilson still expects it tobe a growth area for the insurer.

“People are looking for alternative energy,” so those types ofcompanies will be coming online, she said. “I don't think it willgo in the other direction.”

And given that there is “a wealth of information on anyinsurance company's web portal,” Subacz said, the green field isopen to small and large producers alike.

Blizzard added, “There are some really great small brokers withhuge property schedules who are as sophisticated as we are in greencoverage,” even if “they maybe don't have all the resources wehave.”

After all, Stuckey said, many big companies that likely will gogreen—especially high-tech operations—“haven't gotten there yet.”Green really has no place to go but up.

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