While some may dismiss talk about environmental sustainability as a misguided or even bogus agenda for liberal activists, the economic reality is that "going green" means new, potentially lucrative coverage opportunities that carriers and brokers ignore at their own peril, leaders in this growing field contend.
For the past few years, several insurers have taken an active role in promoting environmental awareness and taking advantage of growth opportunities in this emerging exposure sector. Among the most prominent have been Allianz, Zurich, Swiss Re, American International Group and Travelers.
"We strive for exceptional financial performance and growth based on our commitment to the pursuit of a sustainable world, through combining long-term economic value, environmental stewardship and social responsibility," wrote Allianz in its "Sustainable Development Summary Report 2008."
"We do business now in a way to make a profit and not jeopardize the world, our company or the people in it," said Steve Bushnell, senior director of commercial insurance for Fireman's Fund Insurance Company, an Allianz affiliate.
Fireman's Fund is among a few pioneers in developing insurance programs to cover "green" construction–primarily commercial buildings employing the latest technology to reduce waste and increase energy efficiency.
The carrier began product development for this exploding niche about five years ago, as it became clear that builders were getting more heavily involved in this type of specialized construction, said Mr. Bushnell, noting that Fireman's Fund "Green Gard" products serve two purposes–to fulfill the needs of clients, and to differentiate the insurer in the minds of buyers.
At the same time Fireman's Fund was developing these green products, its parent company, Allianz, developed sustainability studies (see related story on page 14). Mr. Bushnell admitted that while one did not necessarily lead to the other, it does make for a good combination.
From a business standpoint, Green Gard is turning out to have been a good business move, according to Mr. Bushnell, who reported that 25 percent of the company's property book now consists of green coverage, while generating 40 percent of new accounts in that line.
"There is a core group of agents who understand the product and how to sell it," he said. "That is one of the cornerstones of our strategy going forward."
One of those green-savvy brokers is InterWest Insurance Services Inc. in Sacramento, Calif. Skip Rawstron–a commercial producer and real estate insurance specialist for the firm–characterized himself as one of those curious types who wants to understand the latest trends. As his interest expanded in the construction trade, he joined the U.S. Green Building Council (USGBC) in Northern California and learned about green construction–buildings that are energy-efficient and conserve resources.
Last year, InterWest–booking $500 million in premium volume–formed a Green Focus Group to understand the features that go into constructing an environmentally sustainable building that meets the requirements of the USGBC's Leadership in Energy and Environmental Design (LEED) specifications and receives their seal of approval. This taught the firm not only what makes a building LEED-compliant, but also what the insurance applications might be.
As an insurance product, he said the line is still in its infancy. Currently, the population of green buildings is predominately government-owned, but the number of these buildings going up in the private sector is growing.
Government funding for such projects from the recently passed economic stimulus package will mean more green buildings coming out of the private sector, he noted.
One advantage to constructing environmentally friendly structures is that financing is easier to obtain because they are seen as more viable by investors for several good economic factors, he explained, noting that green buildings usually:
o Cost less to operate.
o Rent faster.
o Draw tenants willing to pay more.
o Host more productive employees, because the lighting and air circulation make for a better work environment.
One insurer that appears to be stepping up on the competition is Zurich, which offers coverage on upgrades to green construction and equipment.
Lindene Patton, chief climate product officer for Zurich Financial Services, explained that the insurer has developed a green endorsement for property-related coverage to replace a building after a loss with sustainable building materials and energy-efficient machinery. She called it "betterment coverage," since the commercial property does not need to have been constructed with green material originally.
The thinking behind the move is that by replacing a building with stronger, more durable environmentally friendly materials, the structure will be in a better position to withstand a similar experience, producing significantly less loss in the future, Ms. Patton explained.
The insurer is also offering coverage for alternative electrical power plants–such as those run by solar panels and wind turbine. These policies not only cover replacement of the units but can offer business interruption coverage for revenue lost if the units are not operational for a time, Ms. Patton said.
Besides extending more programs to small business and some personal lines, the insurer is also involved in providing coverage for carbon credits and carbon capture and sequestration technology, Ms. Patton noted.
To get the brokerage community onboard, Ms. Patton said Zurich is doing outreach. This effort consists of one part education (to "understand the overall issues of climate change"), and the other to understand in professional terms what producers can do "to help reduce risk associated with climate change and other environmental risks."
"To me, you have to get people sensitized in a greater way than a sound bite about the broad issue for them, and then to make them understand what they can do, not just in their personal life but professionally, and what insurance tools are out there [for them to use]," Ms. Patton observed.
One national insurance broker, Chicago-based Aon Corp., recently announced the introduction of a single property policy for green buildings, targeted at portfolio property owners with large real estate holdings or a substantial single holding.
Rod Taylor, managing director for Aon Risk Services–who works in the environmental services area–said Aon has created an endorsement to its global all-risk policy. The coverage pays replacement costs for materials and equipment after a loss in a green building, so that the structure meets any necessary upgrades for current LEED requirements. It also modifies business interruption coverage to allow for delays in occupancy while testing for LEED certification takes place.
Aon produced the policy because of the growing interest in LEED certifications among its clients. Large-property portfolios often require a number of insurers for the layering of coverage, and this policy language envisions insurance up to $1 billion. He said the policy language has been accepted by a number of the largest global insurers.
Demand for environmentally sustainable buildings is not just an American or European phenomenon, as it is coming from Asian and Mideast investors who have a heightened sense of sustainability, according to Chris Tattersall, managing director for SMART Business Advisory and Consulting out of London. Energy efficiency is an important metric in their investment decision-making, he noted.
To meet this demand, he said, it will be necessary to produce a database on a structure's energy efficiency for easy access of information and standardization of data.
Insurers, he noted, will ultimately benefit, because this easily available data will make underwriting simpler and more reliable, allowing insurers to measure a building's green viability and risk.
However, the push for eco-friendly buildings is also producing new challenges for the insurance community, warned Robert Wendel, senior manager in actuarial insurance solutions for Deloitte Consulting. The issues raised are not exclusive to property and construction but can include errors and omissions claims, he noted.
For instance, insurers are discovering that the roof of a green building covered with vegetation can increase water damage claims if the materials used in construction are not properly applied to prevent leakage.
On the errors and omission and professional liability side, an architect or engineer could be held liable for the water damage, or a roof collapse caused by the added weight from water, snow or ice accumulated on the roof. There is exposure as well for a design that promises to meet certain LEED designation and fails to do so.
"There is certainly some potential for the expansion of risk," he noted, while adding that "if everything is properly done, it should not affect the risk." He pointed out that accomplishing that goal means working with the USGBC to ensure everything is in compliance, while adding an extra layer of risk management.
In the end, the environmental movement can add additional business for agents and brokers, with opportunities growing rapidly, Mr. Wendel said.
"Those producers who invest the time to understand these issues will jump to the forefront and be part of this business," he said. "If they craft this niche well, they can pull added revenue into their firms."
"I think this is a great opportunity for the insurance industry to leap to the forefront of this issue and drive better understanding of these risks, but also to push American construction and design to the next level," he added. "It is, frankly, a fantastic marketing opportunity for them as well as a good business opportunity."
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