Energy Efficiency: No-Regrets Climate Change Insurance for the Insurance Industry
Lawrence Berkeley National Laboratory
Potential Roles for the Insurance Industry in Increasing Energy End-Use Efficiency
As shown above, the insurance industry has a number of options for responding to the threat of global
climate change through energy efficiency. These options would encourage customers to employ
technologies and practices that inherently reduce the likelihood of insured health and property losses
while increasing energy efficiency.
Some of the opportunities include:
- Adopt uniform protocols for quantifying the risk-reducing aspects of energy-efficiency measures
- Develop innovative insurance products that reward energy efficiency
- Make buildings owned by insurance companies more energy-efficient
- Foster improved energy efficiency and indoor air quality in the process of financing and purchasing buildings
- Collaborate with energy regulators and other stakeholders
- Participate in the research, development, and commercialization of new energy-efficient technologies and services
Adopt Uniform Protocols for Quantifying the Risk-Reducing Aspects of Energy-Efficiency Measures
While this report documents numerous likely benefits of energy-efficiency measures for the insurance
industry, it does not attempt to quantify those benefits or to precisely target where the measures should
be applied (e.g. specific types of buildings, climates). The insurance industry could play a key role in
the development and deployment of standards of practice that, if followed, will reduce the likelihood of
claims.[53] To this end, the insurance industry would benefit from a universally approved and
consistently applied method of quantification, which suggests that there is a role for a centralized effort.
The insurance industry could begin by applying such protocols to its own buildings, and ultimately
require their use on projects seeking premium reductions or other incentives from insurers.
The U.S. Department of Energy's new North American Energy Measurement and Verification
Protocols (NEMVP) is an ideal vehicle for this, although it is currently focused strictly on energy
impacts. The NEMVP is a voluntary consensus document written for technical, procurement, and
financial experts in government, commerce and industry. The NEMVP provides an overview of
current M&V techniques and sets a framework for verifying third-party financed energy projects for
public and private sector projects. Application of the NEMVP helps insure accurate verification of
project savings in a nationally accepted, impartial and reliable manner. Extension of the Protocols to
include the risk-reducing characteristics of specific energy-efficiency and indoor-air-quality measures is
a logical next step.
Develop Innovative Insurance Products that Reward Energy Efficiency
Insurance companies could provide incentives for the adoption of loss-preventing energy-efficiency practices, as follows:
Differentiated Premiums
Insurance companies could develop products that reward customers for implementing energy-efficient
measures that lower the risk of insured losses, e.g., by offering discounted premiums when a property
has features that are energy efficient or contribute to a healthy indoor environment. This is already a
familiar practice in the insurance industry:"good driver" discounts are offered and credits are given for
home smoke detectors, fire extinguishers, or burglar alarms.
Purveyors of Energy-Efficiency Services
Energy Service Companies (ESCOs) are an important agent of energy-efficiency implementation.
ESCOs typically mobilize capital and technical know-how, offering a package of efficiency
improvements to building owners or factory managers. Energy users enjoy the convenience of having
an outside firm implement the measures, and the ESCO is rewarded with a pre-agreed share of the
energy savings. Contracts with ESCOs predict a specific level of energy savings; there is a financial
risk to one or both parties if these savings are not achieved. Conventional professional liability
insurance does not cover performance-related claims. However, the insurance industry could provide
special coverage for building owners or ESCOs, guaranteeing savings through "efficacy coverage"
or "systems-performance" types of policies. The Zurich American Insurance Group already offers such
coverage.
Radon Insurance
Approximately 4 million of the 85 million homes in the U.S. have radon levels that exceed the
Environmental Protection Agency (EPA) guidelines. Typical remediation costs are $1,000-$3,000.
However, because concentrations vary from day-to-day, short-term monitoring results are highly
uncertain. This is problematic when testing is conducted during the short term of the home purchasing
process. A remedy would be to provide radon insurance (analogous to the insurance for appliances and
heating systems widely available to homebuyers today).[54] The insurance company would then provide
a more reliable long-term measurement and pay for remediation if safe levels were exceeded.
Remediation strategies would emphasize energy-efficient techniques.
Geographic information systems are being used to pinpoint the"high-radon" areas in the U.S. which
will vastly reduce the cost of finding the homes with dangerous radon levels and help identify the
market for radon insurance. For example, in Minnesota predicted average countywide indoor radon
levels range to over 5.5 pCi/liter, with the"EPA Action Level" set at 4 pCi/liter (Figure 8).
Figure 8. Estimated average indoor radon concentrations by county for Minnesota. Darker shades
indicate higher radon levels. Homes in white-shaded counties have estimated concentrations below 2.5
pCi/L; predicted levels in the black-shaded counties are greater than 5.5 pCi/L. Also shown is a relative
scale of risks from radon and other health hazards.
Pay-At-The-Pump Auto Insurance
Uninsured motorists pose a significant problem for the insurance industry. A novel concept proposed
for improving vehicle energy efficiency is"Pay-As-You-Drive Insurance."[55] The essence of the
concept is that a portion of the total premium is incorporated in the price of gasoline. Thus, motorists
who drive more pay more (for fuel and for insurance). This differentiated premium is an incentive for
fuel economy and a risk-indexed payment of insurance by each customer. The gasoline price elasticity
could yield both reductions in greenhouse-gas emissions and local public health benefits from reduced
air pollution.
Make Buildings Owned by Insurance Companies More Efficient
"Market Pull" strategies are one of the most innovative approaches to improve energy efficiency. These
strategies harness the purchasing power of large energy users to steer entire markets toward increased
use of efficient technologies. The Swedish government's National Board for Industrial and Technical
Development (Nutek) has been a world leader in this area, organizing owners of large numbers of
buildings (including insurance companies) to set standards for procurement of efficient energy-using
products.[56] A U.S. consortium of government and non-government organizations is also very active in
this area, as is the International Energy Agency. Swiss Re and several other insurance companies are
beginning to collaborate with IEA.
The insurance industry is one of the world's most important owners of real estate. In the United States,
life insurance companies alone own $50 billion worth of commercial real estate, 22% of all institutional
holdings.[57] If insurance companies adopted state-of-the-art practices for technology procurement and
efficient building operations just in the buildings they own, they would make a significant contribution
to reducing energy demand. High-visibility demonstration projects based on controlled experiments in
insurance buildings could quantify the benefits of energy-efficiency measures and set a model for
others.
In the process of making its own buildings highly efficient, the insurance industry would also acquire
considerable skill which could be sold to other property owners and managers. Special in-house
expertise and services could develop into new business lines in energy auditing, retrofit evaluation, and
installation and management of energy-efficient systems, building commissioning, measurement and
verification, and ongoing energy-management services.
Foster Improved Energy Efficiency and Indoor Air Quality in the Process of Financing and Purchasing Buildings
As financiers of real estate ($202 billion of debt financing or 20% of all debt financing in
institutionally-owned buildings in the commercial U.S. market alone[58] ), insurance companies can
promote energy efficiency in several ways.
- Offer differentiated premiums that favor energy-efficiency improvements. This strategy is well-suited for application when a building is purchased, as new insurance coverage is often purchased at that time.
- Encourage inspection and labeling processes that provide consumers with information about energy efficiency and indoor air quality in buildings.[59] The results of inspections could be combined with other information on safety and features that make the building less likely to sustain damage.
- Formally recognize that the savings enjoyed by owners of energy-efficient buildings improves the owners' cash position, which translates into a slightly lower risk of loan default and the ability to qualify for a proportionately larger mortgage than for owners of traditional buildings. The insurance industry could participate in"Energy-Efficient Mortgage" programs that are already being developed. These programs typically target residential buildings but could be adapted to the types of commercial loans for which insurance companies typically provide financing.
- Encourage rebuilding after natural disasters to meet or exceed current energy codes (rather than as-built standards); collaborate with FEMA and other government bodies. Design premiums to encourage replacement construction following losses from fire, earthquake, flood, etc. to meet or exceed current energy standards rather than"as-built" performance levels. The U.S. Department of Energy has already begun to provide practical information to people rebuilding their homes following natural disasters.[60] FEMA is another logical partner in this effort.
Collaborate with Energy and Environment Regulators and Stakeholders
Logical allies of the insurance industry in energy efficiency efforts are building managers associations.
In the U.S., for example, the Building Owners and Managers Association (BOMA) takes great interest
in energy efficiency matters and already has ties with the insurance industry.
Because the insurance industry is a major user of energy in its own properties and a major lender to
other property owners, the insurance industry could benefit from participating in regulatory proceedings
(setting energy-efficiency standards, planning utility demand-side management programs, etc.) that
potentially affect those buildings. Pertinent regulatory proceedings are conducted at both the national
and state levels.
To the extent that the insurance industry is interested in R&D and commercialization of new
energy-efficient technologies, the industry should maintain close contact with public energy and
environment agencies, utility trade associations, and others conducting such R&D. These entities tend
to listen closely to the needs expressed by stakeholders and to welcome collaborative partnerships.
Special opportunities exist for energy utilities and insurance companies to collaborate. These two
industries have common interests: (1) improved cash flow for customers and lower probability of
default on payments for services, (2) effective code compliance, product labeling, and building
commissioning as tools for achieving safety and energy savings and quality control, and (3) an
increasing imperative to incorporate"green" marketing into their way of doing business. Following are
some examples of potential collaborations:
- By joining forces in encouraging energy efficiency, utilities and insurers could share costs and market data. For example, utilities already possess considerable data on the physical characteristics of buildings (e.g., appliance holdings, types of heating systems) in their service territories. Some of these data could be quite valuable to insurance companies attempting to identify energy-related problems and opportunities in those buildings.
- The current process of utility deregulation under way in the U.S. has placed utilities in the unfamiliar position of competing for new customers and convincing old customers not to switch to new providers. By approaching customers with value-added insurance/energy-efficiency products and services, utilities and insurers could retain customers they might otherwise lose to competitors.
- Utilities already possess technical and financial knowledge of the intricacies of implementing energy efficiency. Insurance companies could take advantage of this resource in exchange for bringing new customers to a utility and/or offering incentives (via insurance product design) or financing for customers to participate in utility-insurer programs. Utilities are increasingly interested in mechanisms for loaning money to consumers; insurers have extensive experience in this area (in excess of $200 billion, as noted above).
- Lastly, because both industries are interested in new technology research and development, R&D activities could be combined in some areas.
Participate in the Research, Development, and Commercialization of New Energy-Efficiency Technologies and Services
Little research has been done on maximizing the safety-enhancing aspects of energy-efficiency
technologies. The insurance industry could help fill this void by supporting strategic research and
development (R&D) and/or providing venture capital to move new loss-reducing technologies into the
marketplace. The founding of the Underwriters Laboratory early in this century stands as a precedent
for such an enterprise.[61]
Most of the strategies discussed in the previous section of this paper were supported by federal R&D
programs now falling victim to widespread budget cutting in the Congress. Difficult economic times
have simultaneously led to reduced R&D in the private sector. Further compounding the problem, the
current trend toward utility deregulation has also caused many utilities to reduce their R&D activities
because R&D costs show up in the cost of electricity, rendering their product more expensive than that
of a competitor who does not do R&D. The insurance industry has a vested interest in stepping into
this growing R&D void.
Examples of promising R&D frontiers include fire-resistant windows and paints. Other research
opportunities include definitive studies on the connections between indoor environmental factors (air
quality, lighting, thermal comfort) and worker productivity and health. For example, the causes of Sick
Building Syndrome are still not known.
Important research needs to be done on Building Performance Assurance, which includes building
commissioning, operations, and diagnostics, and employing computer-based systems for
whole-building monitoring, diagnosis, and performance optimization. The goals are enhanced energy
efficiency, and occupant productivity, security, and safety. These goals are of clear value to the
insurance industry to reduce insured losses; insurers could use such systems to operate their own
buildings more efficiently and safely.
A special need exists for Building Performance Assurance in the residential sector. Building codes are
often incomplete and unclear in directions for safe installation of ventilation systems. Designers,
builders, and installers lack adequate tools for avoiding health and safety problems related to
energy-using equipment.
Past experience in the energy sector could be a model for insurance industry R&D. The Electric Power
Research Institute (EPRI) and the Gas Research Institute (GRI) spend more than $1 billion/year for
technology and market research for energy utilities. They provide a common knowledge base for large
and small energy companies and serve as an interface among the numerous energy utility companies,
regulatory bodies, and providers of energy technologies. Given the energy benefits described for the
many insurance loss-reduction strategies enumerated above, it is easy to imagine effective teamwork
among the Department of Energy and/or the Environmental Protection Agency, energy utilities, and the
insurance industry. With proper coordination, this enterprise could bridge the common interests of
disparate insurance subsectors (e.g., property-casualty, professional liability, health, life, workers'
compensation, business interruption, and automobile). Although quite small in proportion to the size of
the industry it serves (an industry even larger than the energy sector), the newly founded Insurance
Institute for Property Loss Reduction (IIPLR) is one venue where such research could take place.
IIPLR's mission is to reduce deaths, injuries, and loss of property resulting from natural hazards.
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