Green is supposed to be far more lush for the insurance industry—so it seemed several years ago.
Communities across the country modified building codes, requiring new construction and major renovations to be more energy efficient. Many project owners took green building even further and obtained formal green certification for their structures. Insurers found that owners of green buildings were safer risks and gave them rate discounts. Insurers also offered owners of traditional construction the coverage option to rebuild green after a loss.
At the same time, alternative energy companies were popping up and needing all kinds of insurance.
In the mid-2000s it looked like not only a developing green insurance market opportunity for producers and insurers but also a quickly sprouting one.
And then—not so much.
Two years ago, insurance market executives lowered their expectations for growth in this area. They were certain the insurance industry would benefit from it eventually. After all, experts reasoned, the greening of buildings and the emergence of alternative energy companies were trends that would not reverse themselves, though worldwide economic challenges were slowing them down.
Today, market results and expectations of executives are much the same: Green business has not been what it can be, but market executives predict the ground is prepared for a bumper crop of business.
Stable market
By 2009, insurers had introduced more than 600 green commercial and personal lines insurance products, and the number was growing, according to Ceres (ceres.org), a coalition of investors and groups that focus on sustainability.
Ceres has not formally reviewed the number of product offerings since then, but insurers are not reporting any product withdrawals.
“I haven't seen new carriers getting into this market the last few years,” said Dwight Stuckey, president and co-founder of MGA Stuckey & Co. of Lake St. Louis, Mo.
The MGA places various property-casualty coverages, including professional and executive management liability insurance, and its clients include alternative energy companies.
The products are not substantially different, either, said Faye Blizzard, assistant vice president and client executive at Alexandria, Va.-based Rutherfoord, a Marsh & McLennan Agency LLC company.
However, she noted, some insurers have refined their green property endorsements not only for their policyholders' benefits but also to make doing business easier for the insurer.
Related: Read the article “Carriers Gain Comfort Level with Green Coverage” by Michael P. Voelker.
At first, Fireman's Fund experienced supercharged growth in its green building-related business. It went from no green business in 2006, when it introduced its commercial lines product, to $100 million of premium by the end of 2007. Then the competition began. For the last 2 or 3 years, the insurer's commercial property premium related to green construction has settled at around $150 million, Bushnell said.
One green coverage offered by numerous insurers is a commercial property endorsement that covers the owner of a conventionally built structure for the cost of repairing or rebuilding the structure green in the event of a loss.
It's the economy
But the weak economy has cinched the purse strings of building owners, 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 organic compounds, market executives said.
But because rebuilding green is more expensive than conventional construction, insurers charge more for an endorsement that provides substantial limits. That additional premium 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 top 100 brokers.
Stead said many of her clients, which are based in the Northwest and on the West Coast, like the option of rebuilding green if their standard construction properties are damaged, but most are “not willing to spend a lot more” for the coverage. “They'll take throw-in insurance to rebuild green, but they won't pay more for the coverage” in a weak economy that has left building owners with lower occupancy rates.
For many buyers, there just is not enough incentive—whether it is inexpensive insurance, a tax break or ultimate energy savings—to rebuild green, said Marie A. Subacz, a senior vice president and client executive at Rutherfoord.
“From our perspective, (green) does seem to have lost its glamour,” said Katie Wilson, vice president-package and general liability underwriting at CNA Financial Corp. in Chicago.
Of course, owners of properties that were built green typically want to rebuild to the same standard after a loss, market executives said. And they can find better coverage deals than owners of conventionally built properties.
For buildings that obtain a Leadership in Energy and Environmental Design (LEED) certification from the U.S. Green Building Council, Fireman's Fund discounts its property insurance premium 5 percent, Bushnell said. It began giving buildings with Energy Star-rated systems and equipment the same discount in 2010.
The insurer has determined those buildings are better risks than standard construction. Not only do the construction materials and the various building systems make the property safer, but building owners committed to energy efficiency tend to be more proactive than owners of traditional construction in protecting their property, Bushnell said.
Fireman's Fund has determined that loss ratios for green buildings are 15 to 20 points lower compared with those for standard construction, Bushnell said.
But construction is sharply down from its 2005 peak. At year-end 2011, construction spending was at a seasonally adjusted rate of $816.4 billion, up 4.3 percent from 2010 but still 46.3 percent lower than in 2005, according to the Census Bureau.
Subacz said that among her construction clients, about 40 percent to 50 percent have started projects that will seek LEED certification—about the same or somewhat more than before the economy crashed in 2008.
Other issues
While the economy is the biggest obstacle to a burgeoning green insurance market, additional factors have not helped.
Some observers say that a segment of producers personally linked green insurance products to the global warming debate and did not give either much credence.
That mindset was such a concern for CNA that it developed an education program designed to build support among agents and brokers placing coverage for commercial construction contractors working on renewable energy projects. CNA built that book of business in large measure because of the program, Wilson explained.
Others say producer mindset is not an issue now, if it ever was.
Related: Read the article “On Solar-Insurance Solutions” by Bonnie Cavanaugh.
In his MGA business, which involves local small agents and some of the nation's top 100 producers, Stuckey does not detect producers giving green coverages short shrift. “Most agents these days are looking for new products to sell,” he said. “They're looking to differentiate themselves in this marketplace.”
But Skip Rawstron, a risk consultant who recently joined Fuller Insurance Agency in Chino Hills, Calif., as a real estate insurance specialist, 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 policy language or ask about available green building endorsement options, Rawstron said. Brokers and agents have to point that out to insurance 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 on rebuilding green.
For example, many codes now contain provisions requiring onsite recycling of building debris and acquiring raw building materials from suppliers located as close to the project site as possible. Those costs are not covered by traditional property policies but often are available by endorsement, he said.
Green buds
Even though green insurance has not taken root quite as expected, insurers are eyeing various green risk coverage opportunities.
Besides its Better Green builders risk endorsement (offsets some costs involved in upgrading, rebuilding or repairing structures according to LEED or Green Globe standards) and its Green Edge property coverage endorsement (provides an independent limit to rebuild damaged real or personal property according to existing green standards), Zurich is offering or considering other coverages that the U.S. market is not ready for yet but other markets are.
Overseas, Zurich rolled out an electric car insurance policy that promises road rescues within an hour when cars lose their charge. The insurer also steers damaged vehicles to repair shops that specialize in electric cars and, whenever possible, provides policyholders with electric car loaners. Foreign markets hold more promise for the coverage now because their electric car infrastructures are more advanced, Patton explained.
Meanwhile, although Zurich's carbon capture and sequestration (CCS) liability coverage has not moved to full-scale market deployment in the U.S. since its 2009 introduction, Zurich has discussed with public policy makers in the European Union and China over possible opportunities for selling the coverage there, Patton said.
Related: Read the article “Winds of Change” by Bonnie Cavanaugh.
And within the past year, Zurich has integrated its environmental mismanagement coverage endorsement into its directors and officers liability policy.
The coverage provided in the endorsement, which Zurich initially offered in 2009, “just became expected” by policyholders as shareholders increasingly inquired about climate, natural resource and environmental issues, Patton said. It covers securities, employment practices and insured-person misrepresentation claims relating to climate change and global warming.
The Chubb Group of Insurance Cos. established a formal approach to providing all types of property-casualty coverages to clean technology business: companies involved in deriving power from renewable resources, creating energy efficiencies or addressing the scarcity of natural resources.
During the first quarter of 2012, Chubb's policyholder count in this segment grew 25 percent compared with the same period last year, said Tampa, Fla.-based Amy Ingram, vice president, worldwide clean tech segment manager.
Most of the insurer's new accounts are small and mid-sized companies, “which are very appealing to Chubb and independent agents,” she said.
Yet those accounts have national and even international reach, largely because of the increasing private and corporate investment in this area, Ingram said.
Investment in clean technology in 2011 totaled $260 billion, a 5 percent increase from 2010 and nearly a fivefold increase from 2004, according to Bloomberg New Energy Finance.
Among the key factors driving that investment is government commitment to renewal energy resource consumption, Ingram said.
She noted that the governments in 29 states, the District of Columbia and Puerto Rico have adopted renewable energy consumption standards, known as renewable portfolio standards.
Among the strongest is New York's, which aims to more than double the state's use of energy from renewable resources to 29 percent of all the energy it consumes by 2015, Ingram said. Similarly, California plans on increasing its renewable energy consumption rate to 33 percent of total energy used in 2020 from 20.6 percent currently, she said.
Plus, by 2030, the world's energy demand is expected to increase 40 percent, Ingram said, which would be equivalent to the energy demands of the U.S. and China combined.
Although green coverages are not yet flourishing in the insurance market, there are some buds and the fruit from the greening of America eventually will be within reach for all producers and insurers to harvest, experts say.
Although CNA's alternative energy construction focus has not been as lucrative as the insurer hoped, Wilson still expects it to be a growth area for the insurer.
“People are looking for alternative energy,” so those types of companies will be coming online, she said. “I don't think it will go in the other direction.”
And given that there is “a wealth of information on any insurance company's web portal,” Subacz said, the green field is open to small and large producers alike.
Blizzard added, “There are some really great small brokers with huge property schedules who are as sophisticated as we are in green coverage,” even if “they maybe don't have all the resources we have.”
After all, Stuckey said, many big companies that likely will go green—especially high-tech operations—“haven't gotten there yet.” Green really has no place to go but up.
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