Greener Opportunities

Jim Henson’s famous Kermit the Frog said it the best, “it’s not easy being green.” Today’s property owners and insurers understand that while it’s not easy, being green can be profitable.

The green building market is steadfastly growing even in tough economic times.

“The green building movement is alive and well despite current economic conditions,” says Fireman’s Fund’s Steve Bushnell, the first property/casualty insurer to create insurance coverages specifically for green buildings.

While Fireman’s Fund Insurance Co. released the industry’s first green commercial building insurance product endorsement in October 2006, the insurer is no longer alone on this front as a number of other insurers have since developed green insurance products in both personal lines and commercial lines.

Marsh’s “Green Built Environment in the United States” report updated in December 2008 says there’s a growing interest among insurance companies in green building. Insurance companies such as AIG, Zurich, CNA, Travelers, Liberty Mutual and Chubb — to name just some — already have green insurance coverages on the market.

“The U.S. Green Built Marketplace continues to grow at a rapid pace,” the Marsh report concludes. “There is increasing interest by the insurance marketplace in understanding the risks and benefits of building green.”

Christine Alderman, new products and services manager for Chubb Personal Insurance, agrees and believes as the green industry continues to evolve so will the insurance industry and its product offerings for the green sector.

“I think that we will see more of a market for green and green rebuilding products as well as insurance,” Alderman said.

Growing Green Market

By 2013, the overall green building market (both residential and non-residential) is expected to more than double, which could offer opportunities for insurance companies and their agents.

Today the green building industry is estimated to be 10 percent to 12 percent of the current commercial and institutional building market, or about $36 billion to $49 billion. But McGraw-Hill estimates the industry will grow to represent 20 percent to 25 percent of new commercial and institutional construction starts, or from about $96 billion to $140 billion in size. And these estimates could perhaps be on the low end, the U.S. Green Building Council (USGBC) says.

Even in a dismal U.S. economy, recent studies and reports point to green building as one of the bright spots. The USGBC reported that in 2008, the numbers of both Leadership in Energy and Environmental Design (LEED)-registered and LEED-certified projects doubled — from about 10,000 registered projects at the end of 2007 to more than 20,000 by the end of January 2009.

Some 75 percent of commercial real estate executives — including developers, rental building owners, brokers, architects, engineers and others — say the credit crunch will not discourage them from building green, according to Turner Construction Co.’s “Green Building Barometer.” In fact, 83 percent said they would be “extremely” or “very” likely to seek LEED certification for buildings they are planning to build within the next three years.

While in years past, the majority of green commercial buildings could be found in federal or state office buildings, that’s no longer the case, says Fireman’s Fund Bushnell.

Green building has “spread to the private sector and office buildings …. hotels, multifamily, hospitals, public and private schools,” Bushnell says. “We’re seeing that the green building movement has become well entrenched and has spread to nearly everyone who owns a building.”

The greening of existing buildings is one of the fastest growing areas in the green building movement as well.

Studies indicate commercial property owners have an interest in updating their existing stock of buildings in many green ways. More than 80 percent of commercial building owners have allocated funds to green initiatives, according to “2008 Green Survey: Existing Buildings,” a survey jointly funded by Incisive Media’s Real Estate Forum and GlobeSt.com, the Building Owners and Managers Association International and the USGBC. And 45 percent of commercial building owners say they plan to increase sustainability investments this year.

Homeowners also are looking to buy green properties or green their current properties as a way to save money and protect the environment, studies suggest. Some 70 percent of home buyers are more or much more inclined to buy a green home over a conventional home in a down housing market, according to McGraw-Hill Construction’s 2008 SmartMarket Report, “The Green Home Consumer.” That number is 78 percent for those earning less than $50,000 a year, the report claims. The report also notes that 56 percent of respondents who bought green homes in 2008 earn less than $75,000 per year; 29 percent earn less than $50,000.

“Homeowners are increasingly conscious of the need to preserve natural resources and protect the environment,” said Alderman of Chubb, which introduced its Masterpiece GreenWise Upgrade coverage option in February 2009. This product will pay the difference between rebuilding the house as it was and rebuilding green. “Homeowners are increasing recognizing the economic value of going green, as it can save them thousands or tens of thousands of dollars over the long haul,” she said.

Green Commercial Markets

In the commercial property insurance sector, in particular, Marsh notes that more carriers have entered the marketplace with increased capacity and varying products.

One insurer to recently enter the green market is CNA Insurance.

In early March, CNA introduced its EcoCare commercial property upgrade extension endorsement, which will allow policyholders to repair or replace damaged property using environmentally responsible and resource efficient materials and processes.

“The green initiative is all around us,” said Katie Wilson, who helped develop CNA’s new EcoCare property endorsement. She said the insurer decided to create the endorsement because of customer demand. Today’s customers are searching for more green alternatives in the event that they have a loss, she said.

While the EcoCare product is the first green product to come from CNA, Wilson says more green coverages are in the works. “The building product is really our first launch,” she said, noting the coverage applies to any property coverage across the enterprise. “But I think what you’ll see from us is probably more green products tailored for industry groups and maybe even some different customer groups,” she said.

Determining proper values to avoid being underinsured at the time of a loss or to avoid being charged too much premium is a critical aspect in the process of obtaining green coverage, Marsh wrote in its “Green Built” report. Examples include valuing the cost of vegetative roofs and alternative water and energy systems, which can be difficult to value because they often involve new materials and technologies, the broker wrote.

Liberty Mutual’s Ann Butterworth, lead underwriter for the insurer’s commercial property green building coverage, agrees and advises agents to consider the possibility of coverages gaps for green upgrades after a loss. This is more important considering today’s trend of commercial property owners that want to go green in the future.

“Most of the normal commercial insurance policies are written on a replacement cost basis,” Butterworth says. “That policy is only going to replace that product that they currently have. It’s not going to upgrade them for the additional costs that it might be to go green.”

Another thing agents should consider is changing state or federal building codes, especially in states like California. “We know that those [codes] are changing,” she said, adding that some codes require or will require customers to rebuild green after a loss. “And if they don’t have the correct coverage on their insurance policy, they will end up absorbing that cost themselves,” Butterworth said.

Liberty Mutual introduced its commercial property coverage for green buildings just a year ago and Butterworth says the product has been “attracting attention.” However, she’s surprised that more businesses are not buying it, especially given the changing regulatory landscape. “We’ve definitely had some great success with a number of prospects and our old clients, but we haven’t sold as much as you might have expected, given the fact that every day in the press you keep hearing about all this new green building,” she said.

Butterworth advises agents to help their insureds understand the cost differential between typical run-of-the-mill building products and green products. While some say that cost differential is leveling off, most green products will still cost more, as high as 25 percent more in some instances, Butterworth said. This might make the case for why they need to purchase the green coverage, she says.

First to the Market

As a number of insurers have jumped into green insurance products in the past year, the first to launch green coverage was Fireman’s Fund.

Today Fireman’s Fund offers green coverages for both personal lines and commercial lines, including products to insure green homes and endorsements to upgrade green after a loss, green coverages for commercial buildings and manufacturers, and coverages for green cars, both personal auto and commercial auto.

According to Bushnell, the green coverage product that has displayed the most success thus far has been its green upgrade product, which provides coverage for upgrading with green materials or green products following a commercial property loss.

“That product has been very popular in the marketplace,” Bushnell said. “We launched in 2006 and the premium associated with the accounts that purchased it at that time was about $5 million through 2006. At the end of 2007, the premium was $20 million. We expect that the premium when we have all of our year-end numbers for 2008 will be $100 million.”

Bushnell said when the insurer first launched the initial green property coverage endorsement in 2006 he believed green properties would be a better risk than those that were comparable non-green risks. So far, that’s proven to be true, he said.

“We’re probably smarter on risk elements of green buildings than we were when we launched the product,” he said, “but overall, we do believe that green buildings are better physical risks than traditional buildings.”

So far, the loss experience on green properties has backed up Bushnell’s belief. “We’ve had just a handful of losses with all the accounts that have purchased the coverage and most of them have been relatively easy to adjust and settle,” he said.

Whether a green risk is a better risk remains to be seen, said Charlie Kingdollar of Gen Re at the Golden Gate CPCU All Industry Day.

Kingdollar, who was a participant on a CPCU panel discussing green risks, says he knows of 14 insurers with green property coverage endorsements today and some are giving away the coverage or offering huge premium discounts because they believe green properties are better risks. But Kingdollar is not convinced that green risks are better insurance risks.

“No one really knows at this stage,” he said. “For instance, for insulation, people are using denim that has a fire retardant on it. Well how long does the fire retardant last? Is it equivalent to fiberglass insulation?” he asked.

Overall, he believes green products are here to stay, but he thinks the jury is still out on whether they’re better risks, and he questions whether they’re worth the huge premium discounts — some as high as 40 percent — that some carriers are offering.

“It is such a new field that I think the one thing that we have learned most clearly is that we have to stay on top of this,” Liberty Mutual’s Butterworth said. “It is an evolving market and it requires a lot of attention.”

Right now, all indications are that green risks are better but most of the evidence is anecdotal, Butterworth adds. There are not enough green buildings and there hasn’t been enough time to study their exposures, she said.

“But over time we will be able to do more studies and the USGBCs of the world will be able to prove that a green risk is better,” Butterworth explained.