It's Now Easy to Offer Green

Buyer demand is encouraging for some products and slower than expected for others, insurers report. And at least one insurer acknowledges there is no demand for its new carbon capture coverages–yet.

Read "Growing with the green revolution."

But the slower demand arc for green coverage overall is not discouraging to insurers.

"It does have emerging market characteristics to it," said Lindene Patton, Washington, D.C.-based chief climate product officer for Zurich Financial Services Group, which offers green coverages in nine areas.

"It's an evolving industry; it's changing by the day," said Joaquin Hoyos, U.S. power manager and executive field underwriter for the Energy Resources Specialty at Chubb Group of Insurance Cos. in Chicago.

More evolution, both in product awareness among agents and brokers and in the economy, would help develop demand for green insurance products, observers said.

Many insurance products focus on new and rebuilt commercial construction. Property owners pay cheaper rates for building green, because those owners' attention to detail makes them better risks for insurers. For slightly higher rates, property policies or endorsements for existing standard-built structures cover the higher cost of rebuilding with costlier green materials after a loss.

Read "Why agents need to know green."

Several other types of green coverages also have been introduced, such as insuring climate-related executive liability risks, carbon sequestration risks, alternative energy companies' property risks and political risks.

Insurers also offer green home and automobile coverage.

At last count a year ago, Ceres (www.ceres.org), a coalition of investors and various groups focusing sustainability, found more than 600 green insurance products and said the number was increasing daily.

Insurers from A to Z–including ACE, Affiliated FM, CNA, Chubb, Fireman's Fund, Lexington, Liberty Mutual, Philadelphia and Zurich–are writing at least one green coverage.

Producer support
Insurers note that many more producers over the past year or two have familiarized themselves with green coverages and services. However, more still need to, observers said.

"Some agents and brokers are ahead of insurers; most are not," said Skip Rawstron, president of risk management and insurance-buying advocacy firm Rawstron Insurance Services, Sacramento.

That's because many initially misunderstood what comprises green insurance, particularly green property coverages, Rawstron said, and with green property coverage for existing structures costing about 5 percent more than traditional insurance, many agents and brokers considered it too expensive during tough economic conditions.

But the higher cost is "minimal" compared with the expense a building owner would shoulder to rebuild a property with green enhancements and the resulting energy savings, Rawstron said, and also tells building owners: "If you ever needed [the coverage], it would be one of the best investments you ever make."

Some producers also link the green concept to what is for some the highly charged issue of climate change and the impact humans have on it.

That prompted some to "push back" against green products, said David Cohen, senior director for real estate at Novato, Calif.-based Fireman's Fund Insurance Co.

In discussions with producers, Fireman's Fund does not focus on climate change. Instead, it locks in on the energy efficiencies of going green and how the insurer's green products support buyers that go green. That makes "a lot of sense" to resistant producers and their opposition is fading, he said.

Their acceptance also has been fueled by the growing number of building codes requiring the use of green materials in new construction and renovations, Cohen said.

In December 2009, the U.S. Green Building Council, which issues the Leadership in Energy and Environmental Design (LEED) certification to buildings meeting green construction and energy efficiency standards, reported that "various LEED initiatives including legislation, executive orders, resolutions, ordinances, policies and initiatives" had been adopted in 45 states by 34 state governments, 202 localities, 17 public school jurisdictions and 41 colleges and universities.

Plus, states and municipalities increasingly are requiring building owners, many of which face stiff competition for tenants, to disclose their buildings' efficiency ratings. California's new energy efficiency notice requirement takes effect next year, Cohen noted.

Lagging product awareness among producers also is an issue that insurers have had to improve through education.

For example, Ann Butterworth, the Weston, Mass.-based director of property underwriting at Liberty Mutual Property, a unit of Liberty Mutual Group, said the insurer has encountered misunderstandings about the value of the green property endorsement it introduced in April 2008.

After a loss, the endorsement would cover the additional cost of rebuilding with green materials, including a vegetative roofing system. It also covers the business interruption losses that result from the extra time required to rebuild green, plus the higher cost of recycling debris rather than the cheaper but less environmentally friendly process of hauling debris to a landfill. In addition, it covers the cost of obtaining certification from LEED or Green Globes that the building meets that organization's green building standards.

"A lot of people don't think they need a green endorsement unless they have a green building" already, missing the point that the endorsement allows them to rebuild green after a loss, Butterworth said.

She also said that some producers and clients have not realized that their building codes have been revised and now include some green provisions–such as debris recycling requirement–that a standard policy does not cover.

Since introducing its green property insurance endorsement in midyear 2009, CNA Financial Corp. of Chicago has focused on educating agents and clients on various issues, said Katie Wilson, vice president, package and general liability underwriting.

For example, because most buyers do not ask about green coverages, agents must take the initiative to investigate whether those coverages could benefit their clients, Wilson said. When a producer points out that green features in new construction or renovation can lower the owner's operating costs and insurance premiums, policyholders become interested, she said.

Producers that are into green coverages report growing client interest.

While there is no great rush to purchase green insurance products, "there seems to be more interest," said Faye Blizzard, an Alexandria, Va.-based senior account executive and assistant vice president at Thomas Rutherfoord Inc., acquired earlier this year by a unit of Marsh Inc.

"And they may not be beating down my door, but that doesn't mean they're not beating down others' doors," she said.

"It's a big topic at seminars and conferences," said Rick Hawkinberry, a Pittsburgh-based senior vice president and environmental industry leader in the environmental practice at Willis North America, a unit of Willis Holdings Group Ltd.

But while product awareness has to be improved, insurers said they do not fault small and midsized producers for not jumping on the trend, especially those located in the country's interior where green is not red-hot.

There also are some risks that everyone tries to understand better, observers said.

One example is climate change, which presents problems for businesses on various fronts, Hawkinberry said. These include regulation of greenhouse gas emissions, a potential carbon tax, federal reporting requirements on climate change risks and litigation in which plaintiffs seek reparations for losses they claim resulted from greenhouse gas emissions that changed the climate and bred catastrophic weather conditions.

"There are all those moving pieces, and no one is sure how they will land," Hawkinberry said.

Keep in mind that the Securities Exchange Commission just released guidelines in January detailing how publicly traded companies must report climate risks, Zurich's Patton said. Meanwhile, no U.S. regulations mandate how to manage greenhouse gases, creating a "governance gap," she said.

Last year, Zurich added an environmental mismanagement coverage extension to its D&O liability policy. It covers securities, employment practices and insured-person misrepresentation claims relating to climate change and global warming.

While insurers rev up their producer education efforts, they also note some need no tutoring.

"Some producers are very aware of the issues," said Chubb's Hoyos.

Take, for example, the scenario in which a Chubb business income policyholder–either a power utility or any other concern that produces its own power and sells the excess–sustains a covered loss to an alternative power generating system. More producers understand that the client's lost production tax credit is covered as part of its business income but that any delay that the loss creates in taking an investment tax credit for the equipment is not an insured financial risk.

Rutherfoord conducts quarterly client seminars on green insurance products, how to measure consumed energy, the requirements of various new laws related to climate change and how the federal stimulus package addresses climate change.

Awareness of green products even on the personal lines side, which "doesn't result in a big change in premium volume," is valuable, said Rod Taylor, managing director at Aon Environmental Services Group, a unit of Aon Risk Services Inc. in Windermere, Fla.

"It gives us the opportunity to talk with clients about something new; it's a valuable marketing tool," he said.

On the commercial lines side, awareness of green insurance products provides "a chance for us to sell additional coverage," he said. Commercial buyers have business interruption as well as physical damage risks that can be underinsured as a result of relying on catastrophic loss modeling tools "that are no longer adequate," Taylor said.

Eye on the economy
The struggling economy also has reined in–though not curbed–demand for green insurance products, insurers say.

For example, Butterworth at Liberty Mutual said the uptake on the insurer's green property endorsement increased less than expected–but still more than 200 percent–from year-end 2008 through the first quarter of this year. "It's another incremental cost that people are saying, 'You know, I'll just put off buying it,'" she said.

Butterworth said she expects demand for the endorsement to double again this year as the economy improves.

Other insurers that either introduced or modified similar coverage last year include CNA and Chubb. Cohen said Fireman's Fund's modified endorsement should be available by July and would cover any product or material that improves energy efficiency so that industrial clients would be covered for the cost of greening up unique machinery that Energy Star typically does not rate.

Based on a survey by a giant construction contractor and the company's own experience, demand for insurers' green building coverages could explode when the economy rebounds.

Turner Construction Co. of New York reported in its most recent "Green Building Barometer," released in 2008, that 75 percent of surveyed commercial real estate executives said the credit crunch would not discourage them from building green. In addition, 83 percent said they would be "extremely" or "very" likely to seek the LEED certification for the buildings construct through 2010.

Turner's own experience bears out the survey's finding.

"Despite the economy, green building actually exploded in 2009," said Michael Deane, vice president and chief sustainability officer for Turner.

While the total value of work in place for Turner fell to less than $8 billion in 2009 from around $10.6 billion in 2008, the value of green buildings rose nearly $400 million to $3.575 billion last year, compared with 2008 figures.

On the personal lines side, new home sales projections suggest that prospects for green homeowners coverage also is improving. The National Assn. of Homebuilders earlier this year projected that new home sales would increase about 23 percent this year to 459,000 units and more than 52 percent next year to 700,000 units.

Those projections would be sharply lower than the more than 1 million units sold in 2006. But a fall 2009 survey of NAHB members found that large percentages of survey respondents are incorporating various green features as standard items in their new home offerings, said Calli Schmidt, NAHB's Washington, D.C.-based environmental communications director.

The stimulus package
Insurers and producers reported that the 2009 stimulus package has not generated much new demand
for green insurance products but expect it will eventually. The package directs about $27 billion in grants and loans toward renewable energy projects, carbon capture and storage projects and smart power-grid technologies.

Some insurers already are prepared.

Zurich, for example, introduced two coverages last year for companies that decide to capture their carbon emissions and store them by injecting the gas or its liquefied form deep underground into oil or gas reservoirs, aquifers that are inappropriate for drinking water or coal seams that cannot be mined.

The carbon capture and sequestration liability insurance policy would respond if the emissions escape into the atmosphere, potable groundwater or a usable coal seam, for example. The policy, which provides up to $50 million of limits, covers pollution liability, well control costs, seismic risk and liabilities associated with transporting carbon, plus business interruption, including carbon offset requirements.

Zurich's geological sequestration financial assurance policy covers the cost of closing full carbon storage wells and then monitoring them. The policy also will respond if the well has to be closed down earlier than planned, Patton said.

The coverages were introduced well ahead of any demand for it, as carbon storage projects have not completed their pilot runs, and the process still must receive regulatory approval.

Until those regulations have been developed, ACE Overseas General, a unit of ACE Ltd., will offer liability coverage only at overseas sites and only for losses resulting from carbon emissions that escape into the atmosphere, said Karl Russek, a Philadelphia-based senior vice president of environmental risk. ACE also will cover the construction risks of carbon capture facilities.

Meanwhile, Chubb began covering the property and liability risks of alternative power generation equipment certified as green. That equipment includes solar, thermal energy, electric and wind turbine systems.

Chubb previously had covered liability risks associated with wind turbines but not property risks, because of losses caused by lightning and, ironically, wind. Turbine design improvements convinced Chubb to cover the property risk, Hoyos said.

Just as green has various definitions, the success of the green revolution in the insurance market will depend on different impetuses: producer awareness, the economy and the development of alternative energy.

A robust green insurance market still could be years in the making. Alternative energy facilities, for example, require long-term capital investment. The economy and the construction sector still continue to recover.

But, as ACE's Russek observed, green coverage "really cuts across many–virtually all–coverage areas." So, for him and others, green inevitably will take root in the insurance industry.

"I think market forces will make it a reality," Rawstron said.

Dave Lenckus has reported on the insurance industry for 25 years, writing for several publications as a staff editor and a freelance writer on issues for agents and brokers, risk managers and insurers. He holds a journalism degree, with additional course work in accounting, from Lewis University in Chicago.