How Green Construction Will Change Property Insurance
March 01, 2016| By Geoff Piggot | Property | English
The main goal of the Paris Agreement, negotiated during the recent UN climate talks in December 2015, is holding “the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels.”1 Countries that adopt the agreement will have to decide their “nationally determined contributions” regarding greenhouse gas emission reduction that will come into force in 2020.
Buildings in the U.S. accounted for about 41% of primary energy consumption in 2010, according to the U.S. Department of Energy. That figure is 44% higher than the transportation sector and 36% more than the industrial sector.2 Therefore, a government that is looking to reduce greenhouse gas emissions is likely to quickly turn its focus to the building and construction industry. Government focus on building construction and occupation will have an impact on the (re)insurance industry in the short term and the medium to long term.
In the short term, planning regulations will be tightened to increase the energy efficiency of buildings and the amount of renewable energy used. When dealing with a claim for a severely damaged building, insurers and their experts will have to negotiate and agree with planning authorities on how a new or renovated building will comply with more stringent regulations. Insurers may have to pay for the installation of solar panels, wind turbines and biomass boilers for renewable energy. Energy efficient lighting, improved insulation and water management are set to become part of building reinstatement. Most of the increased costs will be picked up by local authority clauses, or more specific green construction covers. The time taken to negotiate and implement the changes will extend the restoration period and increase Business Interruption losses.
In the medium to long term, property insurers will continue to see a change in construction methods and materials, bringing new types of risk. We have already seen a move away from using concrete and brick towards materials considered “greener,” such as wood and recycled materials. (Read Leo Ronken’s blog, Straw Bale Buildings - Do They Represent an Increased Exposure?) Better insulation requirements will see the use of materials, such as plastic foams, significantly increase the fire load. Decentralized power generation, such as solar panels or wind turbines that will enable energy production and distribution by consumers, will also lead to more buildings having battery storage systems, and this will increase the fire risk that is due to the use of lead-acid batteries, lithium-ion batteries, more wiring and electrical equipment.
For Business Interruption (BI) claims, energy selling and emission trading will become common issues if the government introduces a system of carbon or emissions trading; this will either increase or decrease the BI cost, depending on whether the insured needs to purchase or sell carbon credits. The BI cost increase will result if the insured is forced to increase emissions as a result of working less efficiently due to the loss. The loss will be reduced if the policyholder can sell its carbon credits due to a halt in production.
The changes to construction methods and materials are going to prove challenging for (re)insurers. Changes to building regulations will increase claim costs in the short term. It will become more difficult to insure a traditional construction portfolio, and previous claims experience may not be reliable for future rating in the long term. (Read Thomas Grollmann’s blog, Is Rapid Urbanization Just Additional Exposure in Cat Models?)