Columnists: Evan Mills, US Lawrence Berkeley National Laboratory

Published at: 14 Dec 2012

The greening of insurance

The energy efficiency community has many successes to be proud of, but making inroads with the world’s largest industry isn’t one of them.

No, it’s not oil. It’s insurance (which is several times bigger than oil). But “insurance doesn’t have much to do with energy efficiency (or climate change)” you say. Think again!

Every sector of the economy telegraphs climate risks to its insurers. In turn, climate change stands as an unparalleled enterprise-wide stress test for insurance, with its U.S. $4.6 trillion in revenues, 7% of the global economy. Munich Re first publicly voiced concern about human-induced climate change four decades ago. Insurers are now helping society understand that climate change is the ultimate risk-management problem.

Insurers know painfully well that multifaceted weather- and climate-related insurance losses increasingly involve property damage, business disruptions, health impacts, and legal claims against polluters. Worldwide, insured claims for weather catastrophes today average $50 billion/ year (about 40% of total direct insured and uninsured costs); they have more than doubled each decade since the 1980s, adjusted for inflation.

Insurers now must also tackle risks emerging from society’s responses to climate change, including how structures are built, how energy is produced, and how we choose to adapt.  None are risk-free. We can count on insurers to look in a hard-ribbed fashion at all proposed climate change responses, both as underwriters and as investors.

Where there are risks, there are also opportunities.

Insurers have been busy.  I’ve shared the story in an article just published in the journal Science . Insurers are actively supporting climate research, developing climate-responsive products and services, raising awareness of climate change, reducing in-house emissions, quantifying and disclosing climate risks, incorporating climate change into investment decisions, and engaging in public policy. As of late 2012, a total of 1148 initiatives have emerged from 378 entities in 51 countries, representing $2 trillion (44%) of industry revenues.

Just one example, near and dear to the hearts of eceee community, is the world of energy-efficient buildings.  There are at least 130 “green buildings” insurance products and services out there.  They range from premium discounts to buildings valued for the loss-reducing attributes of their efficient designs (e.g., multi-pane windows are less vulnerable to fire), to premium adders that in turn fund the customer to rebuild to a higher level of efficiency following a loss, to energy-savings insurance policies that warrant performance (but require good audits, commissioning, and other forms of due diligence to ensure that savings are attained).

Now what?  Government’s have clearly underutilized this industry.  There are some exceptions of great public-private partnerships, but, again, only the surface of what is possible has been scratched.  Some policy wonks probably think they need to teach the insurers, but I suspect the opposite is true just as often, if not more often. Insurers are consummate assessors and managers of risk.

An important need for which insurers are ideally suited is to independently evaluate the comparative risks of climate change mitigation strategies.  As I mused in the Bulletin of the Atomic Scientists recently, insurers aren’t universally happy with any of the strategies (no, not even efficiency … sometimes for good reason, sometimes not so much).  Whether insurers accept any of the risks of climate engineering will be particularly interesting to see. If not, are the policymakers really ready to assume the economic costs of damages from daring global gambits gone amok?  With risk added to conventional cost-benefit analyses, the scales are tipped even more in favor of efficiency and renewables.

The energy efficiency community also hasn’t done much to reach out to insurers. I suppose the opposite could be said as well. Most of that industry’s initiatives have been done independently, which is certainly admirable but they could of course go much farther with the help of organizations like the eceee.  And, if we’re humble enough, we could learn a thing or two in the process as well.

Other columns by Evan Mills