Managing Expectations While Going Green

From increased wildfires to flooding to wind and hail and hurricanes, the risks and resulting losses from climate change grow each year.

While 2023 was the hottest year on record, 2024 is shaping up to beat that placeholder. According to the National Centers for Environmental Information’s Global Annual Temperature Rankings Outlook, there is a 61% chance that 2024 will rank as the warmest year on record and a 100% chance that it will rank in the top five of warmest years ever recorded.

This year’s warmer weather is also leading to near-record warm ocean temperatures and a shift to La Nina conditions, which is raising expectations for an extremely active U.S. hurricane season. The National Oceanic and Atmospheric Administration in May forecasted an 85% chance of an above-average Atlantic hurricane season, with up to 25 named storms. Colorado State University’s tropical meteorology project in April forecasted 23 named storms, 11 hurricanes and five major hurricanes.

More than 32.7 million residential properties from Texas to Maine are at risk of moderate or severe damage sustained from hurricane-force winds, according to CoreLogic’s 2024 Hurricane Risk Report, which equates to a combined reconstruction cost of $10.8 trillion.

The threat of increasing climate risks has energized the transition to a low-carbon economy. However this transition comes with its own set of risks and challenges. Among the concerns are:

• Heightened competition for space and resources for green energy infrastructure.
• Uncertainty over how to handle end-of-life green technologies and their recycling.
• The reality that innovative green and sustainable building materials have not been fully tested for long-term viability.
• Reliance on critical minerals that enable some green technologies present tremendous environmental, social and human rights challenges worldwide.

These risks and challenges are evident in insurance perspectives on two of the most popular green industries: green building and the use of new materials like mass timber, and solar energy and the use of photovoltaic (PV) systems. They also are playing out in how insurers and agents view writing green business risks.

Green and Resilient Buildings

Sustainable design optimizes building performance and minimizes negative impacts on building occupants and the environment while resilient building design focuses on practices and strategies that help create buildings and landscapes that are resilient to the natural disasters of a particular region.

While the green industry, including green building and green energy, has been around for decades, there is increased interest today in building and innovating with both sustainable and resiliency goals in mind.

“Green building does have aspects of resiliency, but I also think resiliency can go beyond just green building materials,” said Patrick McBride, head of construction property, Zurich NA. Nevertheless, green and resilient have become “inextricably intertwined,” he added.

The nation’s largest green building certification program seems to agree. In April, the U.S. Green Building Council (USGBC), developer of the LEED green building certification program, jumped into resilient building by announcing its draft rating system, LEED v5.

USGBC says the newest version of LEED will provide a framework for creating sustainable, efficient and resilient built environments that will also promote environmental responsibility, economic viability and social equity. Centered around three areas, LEED v5 will seek to advance improvements in decarbonization, quality of life, and/or ecological conservation and restoration.

“Buildings offer immediate opportunities for addressing climate change, biodiversity loss, equity, health, and so much more when they are designed, built, and operated with intent,” said Peter Templeton, president and CEO, USGBC, when announcing LEED v5 in April. “This is the architecture behind LEED v5, which targets areas where accelerated progress is most needed while creating pathways that are accessible and applicable.”

According to McBride, there are more sustainable construction projects being built today — solar, wind, battery and energy storage facilities — many of which are utilizing green building materials and incorporating green areas into the design plans.

One example, McBride and Zurich NA are bullish on is the use of mass timber for constructing larger buildings. The family of engineered wood components known as mass timber can be used in place of steel or concrete, both of which are considered significant carbon producers. Wood/timber is also a renewable resource and developing mass timber produces less carbon emissions when compared to the energy-intensive processes needed to produce concrete or steel.

The U.S. mass timber market caught on faster in Europe, which accounts for half of the worldwide volume, according to a report from Allied Market Research. Allied forecasts 6% annual growth in the mass timber market for the next decade, but the number of new builds in the U.S. may exceed that rate, the firm said. Mass timber can be used to build everything from tall timber towers and long-span sports arenas to office buildings, multi-family structures, educational facilities, and more.

Since 2021, Zurich has had a large appetite for mass timber construction risks, McBride told Insurance Journal. “That’s really coupled with our general desire to be one of the most sustainable companies in the world,” he added.

According to McBride, mass timber is a green building material simply because it comes from a renewable source. But “it actually sequesters carbon through the life cycle of the building, so we absolutely feel that it meets one of the criteria that we look for when building out sustainability and construction strategies.”

The “built” environment — which includes all man-made structures — accounts for about 39% of gross annual carbon emissions, according to the World Economic Forum, so bringing in more sustainable strategies to this sector is important, advocates say.

Aside from its greener carbon footprint, mass timber advocates say it also is a more structurally resilient building material. Mass timber buildings are cited as being able to withstand powerful earthquakes and high winds.

The growing interest in mass timber projects led to an update to the International Building Code in 2021, increasing the maximum number of stories and total square footage of buildings built with mass timber. Now towers can be built as high has 25 floors.

While Zurich remains optimistic on the mass timber construction market, some carriers are reluctant to create coverage programs for it and consider it in the same category as light wood frame construction.

A recent blog by Top 100 Agency TSIB Insurance based in Saddle Brook, N.J., said: “While mass timber is designed to be fire-resistant, it is crucial to acknowledge that no material is entirely impervious to this risk. Due to its plywood-like layers, cross-laminated timber (CLT) has been found to char at a slower rate during a fire … However, the added fuel load of mass timber can increase the fire’s growth rate.”

McBride acknowledges that mass timber is not without risk and exposure, but those risks are much different than those associated with a light wood frame structure, he says. “We feel it has inherent qualities that do differ (from light wood frame). Plus, it meets some of those sustainability requirements, which make us excited,” he said.

While mass timber isn’t a new material, loss experience on how it performs over time is still limited, McBride said. But that is changing. There are more and more large commercial projects being built with mass timber construction.

“There’s actually over 2,000 projects that have either been designed, engineered and built, or are under construction today,” he said. The real test will be opening the door to more insurance capacity for this exposure, he said. “I think it’s incumbent upon the carriers to find creative solutions in order to support it because it is for the greater good.”

Solar Rising

The U.S. Energy Information Administration (EIA) expects electricity generation will grow by about 3% in 2024 and 1% in 2025 with renewable energy sources — primarily solar — making up the most of that growth. EIA forecasts solar will provide 41% more electricity in 2024 than in 2023.

That sets up the solar industry for significant growth in the coming years, with some world leaders calling for nations to triple renewable energy, largely solar energy by 2030.

However, this growth could be hindered if insurers continue to rely on inaccurate industry standard models that underestimate the true risks associated with solar projects, according to a recent report by kWh Analytics.

“Traditional modeling assumptions fail to capture the unique characteristics and risks of solar photovoltaic (PV) systems,” said Nicole Thompson, senior data science manager, kWh Analytics, in the firm’s recently released 2024 Solar Risk Assessment report.

This can lead to significant discrepancies when predicting risk, she wrote, adding that standard assumptions can underestimate losses due to physical damage by over 300% in some regions.

“This inaccuracy could have serious implications: Incorrect or unreliable models can drive insurers to have outsized reactions to natural catastrophe losses (decreasing capacity and increasing insurance premiums for solar), while pushing investors to seek higher levels of insurance limits due to their inability to accurately quantify the risk,” Thompson said.

Advanced PV-specific modeling methodologies enable insurers to more effectively assess and price risk, ensuring the financial viability and sustainable growth of the solar industry.

But the frequency and severity of natural catastrophe events continue to grow, and the increase in renewable energy projects in storm-prone states has led Alliant Insurance Services and others to forecast a continued insurance availability gap.

In the Solar Risk Assessment report, Alliant pointed to the value of using technology such as thick, heat-tempered panels and trackers that can protect against hail loss. More sophisticated renewable energy insurers can differentiate projects that prioritize technology selection and operating procedures, Alliant wrote in the report. “Solar project owners who invest in designing, building and maintaining resilient solar sites in combination with bespoke insurance solutions can achieve up to a 50% reduction on rate loads for highly exposed natural catastrophe zones,” Alliant wrote.