Figure 1: Note that the cost of windstorm damage loss has increased in part due to a rising concentration of property and populations in high-risk (e.g., coastal) areas. Inflation-corrected cost reported in 1990 prices; data from Munich Re & Swiss Re.
Global climate change is in the news again, partly because the insurance industry has taken notice of the threat climate change poses to its business. Recent research at the Center for Building Science suggests that selected efficiency strategies can help protect against insurance losses while reducing greenhouse-gas emissions, a winning proposition for the insurance industry.
The world's 1.4-trillion-dollar insurance industry is becoming increasingly concerned about financial risks from natural disasters precipitated by global climate change: windstorms, hailstorms, mudslides, wildfires, flooding, urban heat waves, public health problems, and agricultural damage. According to the Reinsurance Association of America, nearly 50% of the insured losses from natural catastrophes during the past 40 years have been incurred since 1990; the most notable was Hurricane Andrew, with an insured loss of nearly $16 billion.
To the insurance industry, the absence of certainty about global climate change is not synonymous with the absence of risk. The industry is familiar with acting to reduce risks even before full information about them is available. The most prominent expressions of concern about climate change are the Statement of Environmental Commitment by the Insurance Industry signed at the United Nations by 58 insurance companies from 22 countries, formal statements made by the same group at the Berlin Climate Summit of April 1995, and a chapter on climate change and the financial sector prepared for the Intergovernmental Panel on Climate Change (IPCC, Working Group II).
Energy consumption is the largest contributor to global climate change, so promoting energy efficiency is a particularly promising strategy for the insurance industry. Many energy-efficient technologies can also reduce ordinary insured losses involving property, health, or liability. For the buildings sector, efficiency measures can reduce losses from fire, ice, wind, and water damage; temperature extremes; business interruption; occupational injuries; poor indoor air quality; and equipment performance problems. Over the years, the Center has generated a considerable body of research on energy-efficiency measures with the potential to reduce global climate change, as well as insured losses. Here are eight examples:
Human health and productivity are linked to the indoor environment in at least six ways: infections, disease, allergies/asthma, acute sick-building health symptoms, poor worker performance, and electronic equipment failures. Insured health care, lost-productivity, and professional liability costs resulting from indoor air-quality problems are substantial. The Center's Indoor Environment Program has conducted research in a number of areas with implications for decreasing insurance costs: causes of sick building syndrome [Fall 1995, p. 6], reducing indoor pollutant sources, identifying "high-radon" areas [Summer 1994, p. 4; also this issue] and designing radon-resistant homes, and minimizing the use of air recirculation. Other projects have focused on energy-efficient ways of improving occupational safety, such as developing an air vest to protect spray-booth workers from unhealthful working conditions [Winter 1993, p. 7].
By supporting the kinds of strategic energy-efficiency and indoor environmental quality options described earlier, the insurance industry could reduce near-term business risks while contributing to long-term reductions in greenhouse-gas emissions, which also threaten their bottom line. This represents an attractive no-regrets opportunity for the insurance industry, as the risk-reducing benefits would have distinct value irrespective of the timing or extent of avoided damages related to global climate change.
The industry could move forward by developing innovative insurance products (e.g., premium rebates) to encourage the use of loss-preventing efficiency measures, making their own buildings into efficiency showcases, participating in R&D and commercialization of new technologies and services, and collaborating with existing building and appliance standards development and compliance organizations.
— Evan Mills
Center for Building Science
(510) 486-6784; (510) 486-5394 fax
This research is supported by DOE's Office of Building Technologies.
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