It Ain’t Easy [Quantifying] Being Green

Green building practices for residential and commercial properties will have an impact on rebuilding costs after a loss event, but how much remains in question for insurers.

Determining that cost will be key for expanding green building cover beyond a niche product, industry professionals argue.

Builders are increasingly relying on sustainable and energy efficient practices in response to buyer demand and new government regulations.

But the actuarial science around replacement costs for green construction remains scant and is holding back the insurance industry from aggressively expanding coverage.

“Things are lagging behind on the hard work on the actuarial dimensions [of green construction],” says Evan Mills, Ph.D, a staff scientist at the Lawrence Berkeley National Laboratory of the University of California. “There is a lot to be done in quantifying things.”

So-called green building is becoming a popular method of construction in the United States. The U.S. Green Building Council projects the market for commercial and residential green building is likely to more than double by 2013.

More importantly for insurers, the group estimates that the value of green building construction is projected to increase to $60 billion by 2010.

Interest is also expected to increase in the practice following the passage of the American Recovery and Reinvestment Act of 2009. The act sets aside funds for investments in green energy development, creating energy efficient federal buildings and the training of so-called “green-collar workers.”

Some insurers have delved into the waters covering green buildings with new products. For example, Fireman’s Fund Insurance Company created its Green-Gard program in 2006 that offers a suite of products tailored around certified green building practices.

“I believe the insurance industry is addressing these issues and some U.S. carriers have already begun focusing on green and sustainable construction,” said Stephen Bushnell, senior director of emerging industries, Commercial Insurance, for Fireman’s Fund during a recent Insurance Information Institute presentation. “We think it is obvious that green and energy efficiency is not a passing fad.”

But while insurers have discussed green building issues for several years, they have not developed widely available products that could take green building cover into the mainstream, Mills says.

“You often encounter a dangerous and myopic view of green building structures in the risk management community,” Mills argues. “You see a lot of hand wringing about the asserted downside risks of green technologies.”

Mills recently published his annual research on the issue, titled “From Risk to Opportunity 2008: Insurer Responses to Climate Change.”

Part of the issue for the insurance industry is defining what makes a building “green,” says Dennis Costello, a manager of property products research and modeling at AIR Worldwide.

“Green building is a pretty fuzzy term and it can mean anything from materials used in construction to the orientation and location of the building,” Costello says.

Builders are clamoring to incorporate green practices using anything that is quickly renewable, such as bamboo flooring instead of oak.

“Its a very positive buzzword, so suppliers are anxious to adopt it,” Costello adds. “It’s not longer this kind of small niche. It’s growing in popularity and it’s in the minds of everyone in the construction industry.”

The popularity in new home construction using green technology means insurers will need to dedicate significant resources to studying the actuarial impact of the practice.

“If an insurer has a replacement value on a building it is implicitly accepting the risks from that and warranting its use,” Mills explains. “Right now there is not a great existing body of actuarial data. It’s more of an engineering set of information.”

Mills adds that once the insurance industry approaches green building from an actuarial point of view — taking in the possible losses while also crediting the benefits — it will lead to expanded cover and service offerings.

“I see it as a net risk management gain rather than a problem.”

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