The insurance and risk management industries

The insurance and risk management industries are typically considered to have little interest in energy issues, other than those
associated with large energy supply systems. The historical involvement of these industries in the development and deployment of
familiar loss-prevention technologies such as automobile air bags, fire prevention/suppression systems, and anti-theft devices,
evidences a tradition of mediating and facilitating the use of technology to improve safety and otherwise reduce the likelihood of
losses. Through an examination of the connection between risk management and energy technology, we have identified nearly 80
examples of energy-efficient and renewable energy technologies that offer loss-prevention benefits (such as improved fire safety).
This article presents the business case for insurer involvement in the sustainable energy sector and documents early case studies of
insurer efforts along these lines. We have mapped these opportunities onto the appropriate market segments (life, health, property,
liability, business interruption, etc.). We reviewsteps taken by 53 forward-looking insurers and reinsurers, 5 brokers, 7 insurance
organizations, and 13 non-insurance organizations. We group the approaches into the categories of: information, education, and
demonstration; financial incentives; specialized policies and insurance products; direct investment; customer services and
inspections; codes, standards, and policies; research and development; in-house energy management; and an emerging concept
informally known as ‘‘carbon insurance’’. While most companies have made only a modest effort to position themselves in the
‘‘green’’ marketplace, a fewhave comprehensive environmental programs that include energy efficiency and renewable energy
activities.
Published by Elsevier Science Ltd.
Keywords: Insurance; Risk management; Energy efficiency; Renewable energy; Sustainability; Climate change
1. Introduction
It is not often that a significant newa ctor enters the
energy efficiency or renewable energy marketplaces. We
are noww itnessing such an occurrence in the case of the
insurance and risk management industries. Given that
the insurance sector alone is larger than the energy
sector—and that they reach virtually every homeowner
and business in developed countries, and an increasingly
large number in the developing world—the prospect for
their involvement in the development and promotion of
sustainable energy technologies stands as an immense
opportunity for accelerating related energy policy
objectives and market transformation.
The fledgling interest in energy efficiency and renewable
energy by the insurance and risk management
industries is driven by three factors. The first factor is
that a range of relevant loss-prevention benefits are
coming to light (Mills and Rosenfeld, 1994; Mills, 1996,
1997; Mills et al., 1998; Pye and McKane, 2000; Deering
and Thornton, 1998; Vine et al., 1998). As a result, these
measures take on the appeal of more familiar risk
management technologies such as automobile seat belts
or air bags, smoke alarms, or preventive medicine. The
second factor is that insurers (particularly life insurers)
are major players in real estate markets as commercial
building owners and landlords. As interest in facility
energy management grows, insurers stand to benefit
directly by becoming engaged in it. Lastly, increased
*Tel.: +1-151-486-5057; fax: +1-151-486-6996.
E-mail address: emills@lbl.gov (E. Mills).
URL: http://eetd.lbl.gov/insurance.
0301-4215/03/$ - see front matter Published by Elsevier Science Ltd.
PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 1 8 6 - 6
competitive pressures continually motivate insurance
and risk-management companies to develop newpro -
ducts and services (e.g. energy efficiency) that differentiate
firms from their competitors and offer neww ays
to touch customers.
According to the first factor mentioned above, our
inventory of energy-efficiency and renewable energy
technologies revealed 78 specific examples that offered
risk-management benefits, examples of which are shown
in Table 1 (Vine et al., 1998). We identified eight specific
relevant ‘‘physical perils’’, and 15 corresponding types
of insurance coverage (Table 2). Specific examples
include the fire-safety benefits of high-efficiency torchiere
light fixtures (Fig. 1), the freeze-damage benefits
from thermal management in the design of building
roofs (Fig. 2), the occupational safety benefits of highperformance
laboratory fume hoods that reduce likelihood
of hazardous pollutant spills (Fig. 3), and the
roadway safety benefits of photovoltaic-powered lightemitting
diode (LED) roadway lighting (Fig. 4).
The preceding examples pertain largely to physical
damages and occupational safety. In addition, a study
highlighted the particular importance of ‘‘business
interruption’’ insurance, and the increasing vulnerability
of insurers to this type of loss in the face of a worsening
electricity grid reliability situation in many regions (Eto
et al., 2001; Mills, 2001a). Various energy efficiency and
renewable strategies have particular value in the event of
power outages. An often-cited example is the ability of
the Harmony Resort on the island of St. John, which
weathered hurricanes Marilyn, Bertha, Georges, and
Lenny with no loss of (solar) power or (solar) hot water
while other facilities on the islands were disrupted for
weeks or months, losing tourism income in the process
(Deering and Thornton, 2000).
Understanding the great diversity of the insurance
and risk management industries is essential to developing
relevant scenarios for their involvement in the
sustainable energy marketplace. Primary insurance itself
is divided into two main branches (property/casualty
Table 1
Energy-efficiency measures with insurance loss-prevention benefits
Efficient refrigeration. Loss of power can cause significant insured business interruptions and damage to property (Eto et al., 2001). High-efficiency
food and pharmaceutical storage systems will maintain critical temperatures longer in the absence of power, and will be easier (less power demand) to
operate on backup generators.
Energy-efficient windows. During a fire, heat-stressed windows can shatter as a result of differential expansion near the frames, and the increased
supply of air flowing through a broken window accelerates the spread of fire and toxic fumes. Efficient windows reduce the likelihood that fire will
cause breakage (Kluver, 1994). Efficient multiple-pane windows or windows with retrofit films can reduce energy losses by half or more and are also
more resistant to breakage by thieves or windstorms. They also block damaging UV radiation, and enhance occupant comfort (Mills and Rosenfeld,
1994). Tests conducted by Lund University’s Institute of Fire Technology for the Swedish company Pilkington Glass AB identified superior
performance of windows with low-emissivity (energy-efficient) coatings. Double-glazed units with one low-e coating took three- to four-times longer
to break than did ordinary double-glazed units. In addition, these low-e double units performed as well or better than double units with one
laminated glass layer (Anderberg, 1985).
Insulated water pipes. Frozen water pipes have been identified as an important cause of losses in Europe and North America. Cold winters correlate
to significant reductions in the profitability of pipe insurance providers. The US insurance industry paid $4.5 billion in claims during a 10-year period
for freezing pipes in 17 southeastern states. Pipe insulation (or insulation of cold spaces where pipes run) is a simple retrofit that saves energy and
reduces the likelihood of freeze damage.
Duct sealing. Eliminating heating system duct leaks can help avoid dangerous pressure imbalances in a building, which can lead to fires or health and
life risks from carbon monoxide back-drafting of combustion appliances. Suction-like home depressurization can also accelerate the entry of cancercausing
radon gas from surrounding soils. The hot air released by leaky ducts located in attics also precipitates ice dam formation (Fig. 2).
Urban heat island mitigation. Lowering urban air temperatures by increasing the solar reflectance of roofs and roads and planting urban trees has
been shown to reduce air-conditioning costs by up to 50%. Light-colored materials for walls and roofs can be designed to offer the added benefit of
increased fire resistance. Reducing urban air-shed temperatures also slows the formation of smog, which in turn reduces health insurance claims.
Lighter roof coloration has also shown to reduce the likelihood of heat deaths during urban heat waves (Mills, 2002).
Fuel-switching from electric to gas cooking. Cooking is the number-one cause of house fires in Canada. In the Alberta Fire Commissioners analysis of
cooking-related fires in Canada, cooking oil was found to be responsible for 65–75% of kitchen fires, depending on house type. These fires were four
times more common in homes with electric stoves (238 per 100,000 houses) than for gas stoves (58 per 100,000 houses) (Vine et al., 1998). The same
ratio has been observed in the UK. Gas cooking is approximately twice as energy efficient as electric cooking.
Building commissioning. Improper performance of heating and cooling systems is an important cause of litigation, business interruption, and
contractor call-backs in buildings. An emerging practice called building commissioning aims to: increase quality control during the design,
construction, and start-up phases; conduct formal functional testing and inspection of energy-using equipment to ensure that intended performance
(and energy savings of 5–30%) are achieved; and provide for operator training. DPIC, the second largest US professional liability insurer for
architects and engineers, has cited building commissioning as a significant loss-prevention strategy for claims related to heating and air conditioning
systems in buildings. DPIC gives liability premium discounts for firms practicing commissioning.
1258 E. Mills / Energy Policy 31 (2003) 1257–1272
and life/health). Within the property/casualty branch
are many specialized types of insurance, such as
property damage, mechanical equipment breakdown,
professional liability, builders risk, and business interruption.
Energy strategies must be carefully mapped to
the relevant insurance lines, as various types of insurers
have very different technical and market priorities.
While the primary focus of this article is on insurers
and risk managers, related industries can also play
important roles. Beyond primary insurance is the
market of reinsurance (insurance-type contracts through
which the primary, front-line insurers ‘reinsure’ themselves
against extraordinary losses), as well as allied
groups such as brokerages, agents, risk managers, selfinsurers,
and trade organizations.
In addition to firms formally active in the insurance
and risk management arenas, are other potential
industry partners in newinitiat ives for promoting new
energy technologies on the basis of loss prevention.
These include energy utilities, product manufacturers,
non-governmental organizations, consumer-interest organizations,
and government.
2. Case studies
We reviewed proactive steps taken by 53 forwardlooking
insurers and reinsurers, 5 brokers, and 7
insurance organizations, and 13 non-insurance organizations
in the energy-efficiency and renewable energy
arenas. These case studies demonstrate the largely
untapped value of energy efficiency and renewable
energy to the insurance and risk management communities.
We group the approaches into the categories of:
information, education, and demonstration; financial
incentives; specialized policies and insurance products;
Table 2
Physical perils and insurance coverage addressed by energy-efficiency
and renewable energy technologies and strategies (Vine et al., 1998)
Number of measures
offering benefita
Physical perils
Extreme temperature episodes 16
Fire & wind damage 38
Home or workplace indoor air quality
hazards
38
Home or workplace safety hazards 21
Ice & water damage 17
Outdoor pollution or other environmental
hazard
17b
Power failures 35
Theft and burglary 6
Insurance coverage—commercial lines
Boiler & machinery 15
Builder’s risk 4
Business interruption 21
Commercial property insurance 36
Completed operations liability 14
Comprehensive general liability 45
Contractors liability 14
Environmental liability 12
Health/life insurance 39
Product liability 5
Professional liability 19
Service interruption 21
Workers’ compensation 35
Insurance coverage—personal lines
Health/life insurance 35
Homeowners insurance 26
aThe numbers in this column refer to unique technologies and cover
all technologies in Table 4 of Vine et al. (1998).
bThe environmental benefits of improving the outdoor air quality
and reducing greenhouse gases are cross-cutting and thus are not
included in this table.
Fig. 1. Efficient replacements for halogen floor lamps. The so-called
‘‘halogen torchiere’’ (right) has become the fastest selling light fixture
in the US. The fixture’s ultra-hot bulb (operating at approximately
10001F (500 C)) has been the cause of hundreds of documented fires,
plus associated loss of life and injuries. Compact fluorescent
replacements for these bulbs (left) have shown to eliminate the fire
hazard while reducing energy operating costs by 80% and maintaining
light output and quality. The lower panel shows the comparative heat
output of the two systems, using a thermograph.
E. Mills / Energy Policy 31 (2003) 1257–1272 1259
direct investment; customer services and inspections;
codes, standards, and policies; research and development;
in-house energy management; and an emerging
concept informally known as ‘‘carbon insurance’’
(Table 3). While most companies have made only a
modest effort to position themselves in the ‘‘green’’
marketplace, a fewhave comprehensive environmental
programs that include energy efficiency and renewable
energy activities (e.g., Storebrand, 1998; Swiss Re,
1998).
2.1. Information, education, and demonstration
Insurers’ well-established channels of communication
with most property and business owners present a
unique opportunity to disseminate information about
risk management.
The USAA Insurance Company, for example, published
a detailed and extensive guide to energy conservation
for homeowners, providing basic information
on energy saving measures, a simple home energy audit
procedure, and a tool for computing cost-effectiveness
(USAA, 1992). A more general USAA publication on
home remodeling also includes energy savings advice
(USAA, 1996).1
FM Global Insurance Company has aggressively
promoted the risk-prevention benefits of compact
fluorescent torchiere light fixtures, which replace hightemperature
halogen versions known to be associated
with hundreds of structural fires across the United
States (Avery et al., 1998). The activity involved a
Ice Dam Formation
Freezing Temperature
Melt Water
Gutter
Outdoors Indoors
Warm Air Leaks
and Heat Conduction
Melt Water Backs Up and
Leaks into House and Insulation
Poor
Insulation
Ice Dam
Snow
Icicle
Leaky Ducts
Ice Dam Prevention
with Energy Efficiency
Snow
Gutter
Outdoors Indoors
Continuous Air Barrier--
No Air Leaks
Efficient Recessed Lighting
High Level
of Insulation
Well-sealed
Ducts
Insulation Wind Baffle
Water Protection
Membrane
(Ice Dam Protection)
Fig. 2. Reduced heat losses through roofs. Repeated melting and re-freezing of snowcan form icicles and ice dams on roof eaves. Melting water
tends to pond on the rooftop, behind the ice dam, often causing insured damage to the roof and the building interior. Water runoff or falling ice from
rooftops can also present safety hazards. Ice dam formation is accelerated by preventable exfiltration of warm air, insufficient insulation levels,
recessed light fixtures with inefficient lamps that generate waste heat, or leaky heating ducts in otherwise cool attics. Electric heating elements often
installed along rooflines are intended to provide a drainage channel for the water, but they are unreliable and create substantial added energy costs.
1 See also http://www.usaaedfoundation.org/ef home building
techniques.asp.
1260 E. Mills / Energy Policy 31 (2003) 1257–1272
technology demonstration in student housing at Northeastern
University, a follow-up training workshop for
university risk managers in the region, and several
publications distributed to their customers nationally. In
a prime example of cross marketing between government
and insurance activities, FM Global included
prominent mention of the ENERGY STAR labeling
program for efficient (and fire-safe) torchiere fixtures,
operated by the US Environmental Protection Agency
and the US Department of Energy.
In a fewinstances, energy utilities have collaborated
with insurers. Boston Edison participated in the
torchiere project, and the Pacific Gas and Electric
Company has created an umbrella under which efficiency-
related collaborations with insurers can take
place.2
Insurers and insurance associations have also participated
in a number of workshops and other venues for
energy education. A workshop co-organized by the
National Renewable Energy Laboratory and the National
Association for Independent Insurers (NAII)
focused on the disaster preparedness and recovery
characteristics of grid-independent photovoltaic power
systems (Kats, 1998).
The United Nations Environment Program hosts an
international Insurance Industry Initiative for the
Environment, which has approximately 80 member
companies from 25 countries. Information on energy
efficiency and renewable energy has on occasion been
circulated among the participants.
2.2. Financial incentives
Today’s highly competitive, ‘‘soft’’ and ‘‘commoditized’’
insurance market makes it difficult for insurers to
grant premium reductions as an incentive for customers
that implement risk management programs. There are,
however, some notable exceptions.
In the earliest instance of an insurer financial incentive
we are aware of, the Hanover Insurance Company
(c.1980), Worcester, MA) gave a 10% credit on
Fig. 3. High-performance laboratory fume hoods. In a conventional laboratory fume hood, air is drawn past the worker and exhausted through the
top of the hood. Workers and experimental apparatus can interfere with airflows and thereby cause dangerous eddies and vortices (red and blue
circular areas in the inset) with potential for fume spillage and hazards to workers. The Berkeley Hood (shown in photo) instead utilizes a curtain of
air introduced from above and below the hood opening in front of the worker, with up to 70% reductions in airflow (and corresponding energy
savings) and improved worker safety as a result (Bell et al., 2001).
2 See http://www.pge.com/customer services/business/energy/insur
alliance.html.
E. Mills / Energy Policy 31 (2003) 1257–1272 1261
homeowner property insurance premiums in six states to
solar, underground, and energy-efficient homes, with the
justification that the heating systems had fewer running
hours, resulting in a reduced fire hazard (Gordes, 2000).
Insurers can also promote strategic education programs
for their customers—coupled with financial
incentives—be they building owners or building professionals
(Mills and Knoepfel, 1997). Some insurers in
Massachusetts have offered 10% discounts to people
who take a free 6 h course in weatherization, home
repair and other subjects.
A fuel cell vendor (Sure Power) has bundled a highreliability
fuel cell system with business interruption
insurance underwritten by American International
Group (AIG), one of the world’s largest insurers. The
system was installed on a data center of the First
National Bank of Omaha, Nebraska—the country’s
largest independent bank and seventh largest credit card
processor.
Another notable example, pertaining to professional
liability insurance for building professionals, is a onetime
credit of 10% offered to architects and engineers
who receive training in building commissioning. The
credit applies to the Professional Liability policies for
architects and engineers, and reflects research done by
the insurance company (DPIC, an affiliate of the Orion
Group) into the role that building commissioning can
play in pre-empting physical problems—often related to
HVAC systems—that are known to lead to insurance
claims (Brady, 1998; Brady and Dasher, 1998).
A variety of financial incentives have also been
provided for strategies that improve energy efficiency
and reduce risk in the transport sector. The most widely
noted of which is ‘‘Pay-at-the-Pump’’ insurance, in
which insurance is included in the price of gasoline,
thereby rewarding fuel economy and/or reduced driving
(McCracken, 1998). This approach has had a mixed
reception within the insurance industry, however (AIA,
1995; GAO, 1991; Beattie, 2002). European insurers
have awarded credits on personal automobile policies
for customers verifying their use of public transportation
systems. In Germany, premiums are up to 50%
lower for smaller cars driven shorter distances (Zwirner,
2000). Rheinland Versicherungen offers premiums that
are proportional to miles driven (Berz and Loster, 2000).
The American Insurance Association has also generally
supported mass transportation as a means for improving
energy efficiency and highway safety (AIA, 1999). In
perhaps the most innovative effort to date, through a
pilot program offered in Texas by the Progressive Auto
Insurance company, drivers are being charged based on
actual mileage driven, time of day, and geographic
location. With support from the US Department of
Transportation’s Federal Highway Administration, the
Insurance Institute for Highway Safety, and Environmental
Defense, Progressive is using global positioning
Fig. 4. Light-emitting diode lighting (LEDs). Emerging applications for LEDs promise significant energy savings. They are already widely used in
red and green roadway signal lighting and Exit signs. Transportation officials cite safety benefits due to improved visibility and reliability (far longer
service life and lower maintenance costs than traditional lamps) (Said, 2001; Prey, 2001). Moreover, they can be economically powered by
photovoltaics with backup batteries, to ensure availability during periods of power outages. White LEDs are also beginning to be used for waylighting,
promising significantly reduced energy use and improved safety (Borg, 2001). The photo shows tests underway on Swedish roadway
(Orreberget) known for high accident rates. Each pole requires only 3W of power, which corresponds to lighting energy demand reduction of up to
90% compared to standard lighting systems. In preliminary evaluations drivers have reacted positively. Tests currently underway or planned in
Sweden cover 17 miles or roadway, and approximately 800 poles. The inset shows an individual pole head using 10 LEDs (current systems require
only 4 LEDs).
1262 E. Mills / Energy Policy 31 (2003) 1257–1272
Table 3
Insurance-related activities involving energy efficiency and renewable energy
Information, Specialized Customer Codes, In-House
Education, & Financial Policies & Direct Services Standards, Research & Energy Carbon
Country Demonstration Incentives Products Investment & Inspections & Policies Development Management Insurance
INSURANCE & REINSURANCE COMPANIES
American International Group (AIG) US • •
American Modern Insurance Group US •
Aon Risk Services US • •
Bankers Insurance Group US •
Blue Cross & Blue Shield Mutual of Ohio US •
Boiler Inspection & Insurance Company CA •
•
CGNU (formerly General Accident) UK •
Chubb US • •
Connecticut Mutual Life Insurance Home Office US •
Continental Insurance US •
Delta Lloyd Verzekeringsgroup NV NL •
Developers Professional Insurance Company (DPIC) US •
Employers Re US •
First Treasury CA •
FM Global (formerly Arkwright Mutual) US • •
Gerling UK • •
Grange Mutual US
Guy Carpenter and Company US •
Hanover US •
Harleysville Mutual Insurance Company US •
Hartford Steam Boiler (HSB/IPT & Canadian Subsidiary) US • • •
Independent Insurance UK •
ITT Hartford Group, Incorporated US •
Johnson & Higgins US •
Lloyds of London (NatureSave Insurance) UK • • •
Milwaukee Insurance US •
Minnesota Mutual Life Insurance Company US •
Munich Re D •
Nationwide Mutual Insurance Company, Inc. US •
New York Life Insurance & Annuity Corp. US •
North American Capacity Insurance Co. (owned by Swiss Re) US •
Pennsylvania Blue Shield US •
Phoenix Home Life Mutual Insurance Co. US •
Progressive Auto Insurance US • •
Provident Life & Accident Insurance Co. US •
Prudential Assurance UK •
Prudential Insurance Company of America, Inc. US •
Reinland Versicherungen D •
Royal Maccabees Life Insurance Company US •
Safeco US •
St. Paul Fire and Marine Insurance US •
Sorema Re CA •
State Compensation Insurance Fund US •
State Farm US •
State Farm Mutual Automobile Ins Co US •
Storebrand N • • •
Swiss Re CH • • •
Trygg-Hansa S • •
USAA US • •
USF&G was (merged w/by St.Paul's Co.) US • •
Victoria/Ergo D • •
Westbend Mutual US •
Zurich American Insurance Group / Steadfast US •
INSURANCE BROKERS & AGENTS
AON US •
Clair Odell Group US • •
Morris & Mackenzie CA •
NRG Savings Assurance US •
Willis Corroon/Willis Canada US/CA • •
INSURANCE ORGANIZATIONS
Advocates for Highway and Auto Safety US • •
American Insurance Association (AIA) US •
Institute for Business and Home Safety (IBHS) US • •
Institute for Catastrophic Loss Reduction CA • •
•
Insurance Institute for Highway Safety (IIHS) US
National Association of Independent Insurers US •
United Nations Environment Programme Insurance Initiative Int'l •
OTHERS
Boston Edison Company US •
Building Air Quality Alliance (BAQA) US •
Building Code Assistance Project (BCAP) US
Environmental Defense US
Federal Highway Administration (FHA) US
International Energy Agency Multi- • •
Iowa Department of Natural Resources US
Pacific Gas & Electric Company US •
Roofing Industry Committee on Wind Issues (RICOWI), US •
U.S. Department of Energy, Denver Support Office US • •
•
•
U.S. Department of Transportation US •
U.S. Environmental Protection Agency US • •
Waterhealth International US •
E. Mills / Energy Policy 31 (2003) 1257–1272 1263
technology to track customer’s actual driving habits and
adjusting monthly insurance bills accordingly. Preliminary
evidence indicates that the participants in the
program are driving less. The US Environmental
Protection Agency (EPA) will work cooperatively with
the other partners to study the reduction in auto
emissions, if any, from participating in the innovative
insurance plan.3
2.3. Specialized policies and insurance products
Another strategy available to insurers is to design new
types of insurance policies and products that promote
risk-reducing sustainable energy technologies and strategies.
Central to the success of such policies are robust
measurement and verification procedures and methods
to model and quantify the uncertainties. Insurers have
begun to interface with the US Department of Energy’s
International Performance Measurement and Verification
Protocol (IPMVP) (Kats et al., 1999).
As an example, we have identified 12 past and present
providers of specialized insurance policies for thirdparty
energy service companies that implement energy
efficiency technologies (Table 4). The policies protect the
installer or building owner against under-achievement of
contracted energy savings targets, and thus help reduce
business risks for the emerging energy service industry.
These insurers thus have an incentive to promote quality
assurance and post-retrofit savings monitoring and
verification. We have identified a $1 billion/year market
potential for Energy Savings Insurance in the US (Mills,
2001b).
The weak link in this emerging market is the lack of
actuarially sound methods of quantifying the uncertainties
and targeting measurement efforts. Reduced uncertainty
would translate to lower ESI premiums, and
lower costs of financing. Associating projected financial
returns with risks would also motivate financial decision
makers to take energy efficiency more seriously as an
investment avenue. The current crises in corporate
accounting practices and within the ESCO industry
lends additional primacy to this issue.
A company within the Lloyds of London syndicate
has launched a new‘‘N aturesave’’ commercial property
policy, emphasizing that sustainable development and
responsible risk management can go hand in hand.
Insureds receive specialized surveys (known as Environmental
Performance Reviews). The company offers a
household property policy, and directs 10% of premiums
to environmental projects.
Other innovative examples involve newpro ducts or
services to help address indoor air quality problems, an
issue integrally related to energy performance. Indoor
air quality is a significant emerging issue within the
insurance industry (McGowan, 1996; Diamond, 1999;
Ceniceros, 2001), as evidenced by a flurry of insurance
press coverage including cover stories in two of the
industry’s leading trade journals (Goch, 2001a; Deering,
2001). The issue is affecting residential and commercial
customers alike. While most such claims are settled out
of court, six past US examples that we have identified
resulted in payouts totaling $100 million (Chen and
Vine, 1998, 1999; Goch, 2001a).
Mold-related problems are the leading concern at
present, with construction defect suits and litigation
among the fastest growing areas of tort litigation in the
US—with nearly $130 million in paid claims anticipated
for Texas alone in 2001 (Deering, 2001). The co-chair of
a National Association of Independent Insurers (NAII)
task force on the issue said that mold could be the next
Table 4
Selected insurance companies offering Energy savings insurance
Insurance companies
AIG (US)
Hartford Steam Boiler (US) and affiliate Boiler Inspection & Insurance (Canada). Both firms nowow ned by AIG
CGU (UK, Canadian Subsidiary)
Chubb (US)
Employers Re (US)
Lloyds of London (UK)
NewHampshire Insurance Co. (US subsidiary of AIG)
North America capacity Insurance Co. (US, owned by Swiss Re)
Safeco Insurance Company of America (US)—surety bond
Sorema Re (Canada—Nowow ned by Scor Reinsurance; reinsures BI&I*Q policies)
US Fidelity and Guarantee Co. (US)—surety bonds
Zurich American/Steadfast Insurance Co. (US)
Agents/Brokers
Aon Risk Services (US)—broker
Morris & Mackenzie (Canada, broker)
NRG Savings Assurance (US—sole agent representing NACICo)
Willis Canada (Broker—US headquarters)
3 See http://www.epa.gov/projectxl/progressive/index.htm.
1264 E. Mills / Energy Policy 31 (2003) 1257–1272
‘‘asbestos’’ in terms of litigation and insurance losses; as
many as 10,000 cases may already be in litigation across
the US (Deering, 2001). In the UK over the past 10
years, tenant groups have brought lawsuits against large
municipal landlords for property damage and health
effects caused by inefficient, damp dwellings. This has
stimulated a significant amount of energy efficiency
retrofit work.
Following are three prominent examples of proactive
responses to indoor air quality concerns by insurers:
* The Building Air Quality Alliance (BAQA) developed
a ‘‘due diligence IAQ screen’’ to help building
managers reduce their potential liability by completing
a checklist to ensure that a building has good
indoor air quality practices. BAQA has developed an
IAQ risk assessment protocol and an IAQ insurance
policy for building owners with the Clair Odell
Group, an insurance brokerage firm, and an insurance
provider.
* Environmental Resource Process Management
(Atlanta) and an unnamed insurance underwriter
are working together to develop a way of assessing
IAQ risks in buildings, and to offer a form of liability
coverage that would pay for correcting the IAQ
problem.
* Willis Corroon, a major insurance broker, is also
developing a newtype of IAQ policy for property
owners, managers, and developers. The product will
bundle insurance with audits and guidelines on
design, construction, and maintenance practices that
minimize the risk of IAQ problems. Coverage will
include payments for the correction of problems and
loss of use.
2.4. Direct investment
Insurers are among the more significant players in
world financial markets, and these involvements often
touch on the energy sector. As an illustration, insurers
were responsible for about 15% of all contributions to
US money and capital markets in 1996 (American
Council of Life Insurance, 1997).
A fewinsure rs have demonstrated an interest in
venture capital investment in sustainable energy technologies
(Deering and Thornton, 2000). Swiss Re, for
example, invested in a US-based solar photovoltaic
company that is developing newmanufa cturing techniques
(Business Wire, 2000). Gerling—a UK-based
insurer—has founded the Gerling Sustainable Development
Project (GSDP), through which they have
established the $100M Sustainability Investment Partners
(SIP) to provide venture capital, carbon offset
financial products (e.g. under the Clean Development
Mechanism or Emissions Trading schemes), and carbon-
target insurance. Norway’s Storebrand, Swiss Re,
and Victoria/Ergo of Germany have partnered with
Gerling on the SIP initiative (Kohler, 1999).
The Storebrand Principle Global Fund (formerly
known as the Storebrand-Scudder Environmental Value)
is an early example of environmental investing, to
which insurance companies (Swiss Re, Gerling, Trygg-
Hansa) and other investors had already contributed
$133 million as of 1999. Energy efficiency is one of the
criteria used to evaluate securities as they are considered
for inclusion in this fund.
In the renewable energy project finance market, US
life insurance companies were the number-one lender for
independent power projects during the 1980s (Selman,
1999).
2.5. Customer services and inspections
The risk-management benefits of sustainable energy
strategies suggest possibilities for entirely newpro fit
centers within insurance firms, or their subsidiaries.
Chubb Insurance Company has avoided claims
thanks to the use of infrared cameras in detecting
electrical and other risks. Some of the risks identified
also correlate with energy inefficiencies, e.g., refrigerant
leakage, water damage to roofs, eroded insulation in
steel-making furnaces, and ruptured underground district
heating lines. Munich Re has recommended the use
of IR cameras as a loss-prevention tool, citing the
prompt detection of broken hot water pipes as an
example of howto minimize water damage losses and
save energy. IR sensing technology is also widely used in
identifying heat losses in building envelopes.
Hartford Steam Boiler has been a leader in mechanical
equipment inspections, as evidenced by its eyeopening
IR analysis of electrical and other fire hazards
in 200 NewYork City buildings, and more recently
through a subsidiary that provides energy management
services along with a broader constellation of facilities
management assistance. Infrared inspections might also
prove useful in other areas, such as identifying heat
losses (and associated energy waste) in roofs that invite
costly ice dam formation or poorly insulated pipes
exposed to freeze damage.
Norway’s Storebrand has conducted customer-focused
activities in which they provide building inspections
(commercial and residential) and provide advice
on improving indoor air quality and energy efficiency.
2.6. Codes, standards, and policies
Insurers have long been involved in the development
and support of building standards integral to the
disaster-resilience of the properties they insure. To the
extent that energy-efficient technologies can offer risk
management benefits (e.g., reduction of ice damming
risks or elimination of pilot lights), insurers could
E. Mills / Energy Policy 31 (2003) 1257–1272 1265
expand their involvement to include the energy dimension
of building and appliance codes and standards.
While the insurance industry’s Institute for Business
and Home Safety (IBHS) and the Canadian Institute for
Catastrophic Loss Reduction (ICLR)—both insurancebased
organizations—have endorsed the improved
enforcement of building energy codes (Lecomte et al.,
1998), there are as yet fewif any examples of individual
insurer involvement in the energy code arena. The
endorsement by IBHS and ICLR was made in a report
published in the aftermath of the great North American
ice storm of 1998 in which energy-related service
disruptions resulted in considerable insurance costs
(Lecomte et al., 1998). The authors encouraged the
systemic promotion of energy-efficient and renewable
technologies as an element of a newinsura nce paradigm
based on ‘‘sustainable development’’ and the prevention
of losses following disasters.
Opportunities also exist in the transport sector. An
active state and federal lobbyist for highway safety is the
Advocates for Highway and Auto Safety (1999).
Advocates’ members include most major auto insurance,
health insurance, and public health and safety organizations.
An interesting policy position of Advocates
relevant to energy use is that they support federal
controls on speed limits and increased funding for public
transport. Advocates supports public transport to reduce
air pollution and accidents due to road congestion
(Advocates 1999). In Congressional testimony, the
assistant general counsel for the American Insurance
Association (AIA) and spokesperson for Advocates,
David Snyder, made a special point of the importance of
reducing highway speed limits and improving public
transport to combat perhaps the leading cause of
accidents, aggressive driving. Snyder cited reports that
over half of all accidents are due to aggressive driving
such as speeding, tailgating, red light running, passing
on the shoulder, unnecessary flashing of headlights, etc.
Snyder attributed aggressive driving to higher speed
limits and increased congestion. AIA also advocated
reduced speed limits as a means of reducing energy use
and enhancing highway safety in a policy paper on
climate change (AIA, 1999). In early 2002, the Insurance
Institute for Highway Safety became the first insurance
organization to support the stalled Corporate Average
Fuel Economy (CAFE) standards, citing newtechni ques
to improve fuel economy without compromising safety
through reduced vehicle weight (Beattie, 2002).
2.7. Research and development
We have previously discussed the role that insurers
can play in energy R&D (Mills and Knoepfel, 1997).
Insurance-related technical organizations such as the
Factory Mutual Research Corporation and Underwriters
Laboratory evidence insurers’ historic role in
technology assessment and R&D. However, with a few
modest exceptions, the resources of these organizations
have yet to be focused squarely on the opportunities for
innovation in the intersection of energy and risk
management.
One example of such a partnership is a Cooperative
Research and Development Agreement (CRADA)
between various elements of the US insurance and
roofing industries and the US Department of Energy’s
Oak Ridge National Laboratory. The private partner is
the Roofing Industry Committee on Wind Issues
(RICOWI), which includes all major roofing trade
associations in North America and various insurance
partners (the Institute for Business and Home Safety,
State Farm, and Chubb) (Vine et al., 1998). One aim of
this cost-shared project is to analyze mechanisms of roof
failure during severe windstorms and to identify specific
ways in which energy-efficiency detailing can also
enhance roof structural integrity in the face of such
storms.
IBHS, focusing on natural disaster preparedness and
recovery, partnered with the US Department of Energy
in developing and deploying an extremely low-energy
ultraviolet water disinfection system. The design is based
on UV Waterworks, which utilizes small ultraviolet
lamps to disinfect the water (Gadgil and Shown, 1995).
The device will be manufactured by WaterHealth
International, and can be operated with solar photovoltaic
cells when grid-based power is unavailable. IBHS
has also explored topics such as frozen water pipes and
rooftop ice damming, for which, as previously noted,
some risk management solutions also yield energy
savings.
2.8. In-house energy management
The insurance industry (especially the life insurance
segment) is one of the world’s most significant owners of
real estate. Our survey of ten largest insurance
companies globally identified assets in real estate
(buildings, land, movables) amounting to $US 105
billion (Mills and Knoepfel, 1997). The exact figure for
the floor area of these buildings is not known, but we
estimate it at about one billion square feet (108 square
meters), corresponding to an annual energy expenditure
of $US1.6 billion. Many insurers operate in-house
energy management programs, with varying degrees of
effort.
Given the importance of computer-related tasks in
insurance operations, the potentially beneficial impact
of energy-efficient technologies on worker productivity
can be of particular importance. In a carefully controlled
research study, West Bend Mutual Insurance
Company reported a 7% increase in productivity
(numbers of files processed pertaining to applications,
endorsements, renewals, and quotes) following the
1266 E. Mills / Energy Policy 31 (2003) 1257–1272
implementation of a variety of energy- and non-energy
related worker environment improvement measures
(Kroner et al., 1992). Energy savings were 38% and
were statistically associated with one-third of the total
productivity gain.
One particular concern for insurers is the ability to
process claims following natural disasters. One company—
AmericanModern Insurance Group—is testing a
mobile office system (Fig. 5) powered with photovoltaic
panels in order to process post-disaster claims in areas
without power (Gordes, 2000).
As large real estate owners, insurers also tend to
purchase enormous volumes of energy-using equipment.
Several European insurance companies (Delta Lloyd
Verzekeringsgroup NV, CGNU, Independent Assurance,
and Prudential Assurance) are collaborating with
the International Energy Agency to harness the purchasing
power of large building owners to create new
markets for energy-efficient photocopiers.
Lastly, US insurers are beginning to look at the
benefits of participating in the government’s voluntary
energy savings programs, such as Rebuild America and
ENERGY STAR. Thanks to energy management
efforts at its headquarters, the Hartford Steam Boiler
Inspection and Insurance Company is the first insurer to
receive the ENERGY STAR building label (Fig. 6).4
Twenty-two other insurers have participated in the
ENERGY STAR Buildings or Green Lights Programs.
Given the scale of insurer real estate ownership, the
industry has an unparalleled opportunity to display
leadership by example in the field of energy management.
2.9. Carbon insurance
Several insurance companies have recognized or
otherwise explored the potential for new products
related to the performance of energy efficient and
renewable energy projects implemented under the socalled
Joint Implementation (JI), Clean Development
Mechanism (CDM), and Emissions Trading systems, all
of which are methods of implementing carbon-emission
reductions under the Kyoto Protocol to the UN
Framework Convention on Climate Change (Zwirner,
2000; Swiss Re, 2000).
Storebrand—Norway’s largest insurer—has proposed
an innovative concept for insuring carbon emissions
contracts (Willums and Solsbery, 1999). The essence of
the concept is for insurers to themselves develop carbonsaving
projects and bank the resulting emissions for use
in paying claims resulting from under-performance of
specific projects or contracts developed by its customers.
One US firm, AON (the world’s largest insurance
broker) launched AON Carbon—subsequently renamed
AON Environmental Solutions—to provide insurance
associated with carbon-market risks (AON, 2000;
Aldred, 2000).
Insurers note that perceived risks and absence of riskmanagement
strategies increases the cost of capital for
greenhouse-gas-reduction projects.
3. Barriers to insurer involvement in sustainable energy
While the preceding case studies showthat there is a
remarkable level of activity among insurers, there
remain various barriers to significantly expanding the
level of participation by insurers and risk managers.
Fig. 5. Using Photovoltaics for Disaster Recovery. One example of using PV systems in disaster recovery operations involves Direct Global Power’s
Reconstructive Solar Technology and Relief Taskforce (RESTART), which deploys solar-powered sources for use in disaster-stricken areas. The
system shown in the photo was leased for demonstration purposes by American Modern Insurance Group to process claims in disaster areas without
power (Gordes, 2000).
4 See http://www.epa.gov/buildings/label/html/190.html.
E. Mills / Energy Policy 31 (2003) 1257–1272 1267
These barriers are summarized in Table 5 and described
in more detail below.
3.1. Technical issues
While there is a growing literature and documentation
of the risk management benefits of energy-efficient and
renewable energy technologies, there remains a need for
more specific quantitative information. In some cases,
actuarial-quality statistical analyses may be required; in
other cases, engineering-type documentation of the
benefits may suffice. This need was corroborated by a
group of insurers interviewed by the Iowa Department
of Natural Resources (IDNR, 2000).
Surprisingly, insurers are rarely involved in technology
R&D. Although there are some notable exceptions,
most insurance research is focused on the financial and
market issues.
Another significant barrier is that energy-efficient
technologies can at times work at cross purposes to the
goals of risk management (Mills and Knoepfel, 1997;
Vine et al., 1998). Although the use of sustainable
energy technologies and strategies generally reduces
insurance risks—or is risk-neutral—if applied incorrectly
energy management can compromise indoor air
quality, cause water damage, pose fire hazards, etc.
Various entities within the insurance community have
made reference to such problems. Even very prosustainability
European insurers Gerling and Rheinland
Versicherungen and have been careful to flag potential
downsides (Kohler, 1999; Zwirner, 2000). Perhaps the
most widespread instance is the negative association
Fig. 6. Insurers Apply ENERGY STAR Label to their own Buildings. Headquarters of Hartford Steam Boiler Inspection and Insurance Company
was among the first recipients of the ENERGY STAR commercial buildings label.
1268 E. Mills / Energy Policy 31 (2003) 1257–1272
between indoor air quality problems and energy
efficiency in buildings (Frazer, 1998; Diamond, 1999).
As a case-in-point, over $100 million has been paid out
for water damages caused by externally applied foam
insulation retrofits (Deering, 2001), and mold has
become a crisis that insurers say may be as great as
the one posed by asbestos. More energy-efficient, gas
cooking can contribute to indoor air pollution (Jarvis
et al., 1996). Downsides have also been noted in the
transport sector, e.g., Mooney (1998) raised concerns
about safety problems from lightweight, efficient vehicles,
although this has been largely dismissed (GAO,
1991; Beattie, 2002). The American Insurance Association,
while supportive of certain efficiency options, has
also stated that certain measures could present adverse
risk characteristics (AIA, 1999). The US insurance
industry’s premiere trade journal featured a story about
the uncertain safety aspects of gas-electric hybrid cars
(Goch, 2001b). These problems are generally resolvable,
but energy R&D organizations (public as well as
private) are driven largely if not exclusively by relatively
narrowenergy-rela ted objectives and do not necessarily
consider risk management issues. It is also prudent for
energy-efficiency enthusiasts to be thoughtful about the
impacts of their proposals on the insurance sector’s
business environment. As mentioned above, ‘‘Pay-atthe-
pump’’ automobile insurance was promoted heavily
in the name of energy savings and combating the
uninsured driver problem, but was perceived as a very
unattractive business proposition by some in the
insurance community (Sommer et al., 1995; AIA, 1995).
3.2. Nature of insurance industry and marketplace
The insurance industry is highly competitive and
there are numerous disincentives to assume the risks
associated with new products and concepts. Fragmentation
among the types of insurers, plus the allied
industries of reinsurance, brokerages, agents, and
self-insurers can also impede innovation and the
diffusion of newbus iness concepts. While many perceive
the insurance industry as a monolith, the reality
is quite different. In the US alone, there were 3316
property-casualty companies and 1969 life and
health companies in operation as of 1996. Added
to this are thousands of firms who provide allied
services.
Especially in the United States, insurers have had a
difficult history with issues pertaining to environment
and pollution prevention. Many years of litigation over
‘‘Superfund’’ toxic waste cleanup has translated into
billions of dollars in unanticipated costs and headaches
for insurers. While the types of energy initiatives
outlined in this paper are a far cry from waste cleanup,
the association with ‘‘environment’’ can nonetheless
dampen insurer enthusiasm.
There are also a variety of regulatory hurdles
(Mills, 2002). Insurers must seek approvals for rate
changes and investments, including those designed
as incentives for energy efficiency or renewables.
Diversification into subsidiary industries (such as
Energy Services) may also invoke regulatory review.
Similarly, in the US, insurer R&D costs cannot
ordinarily be placed into the insurance premiums.
Meanwhile, the regulatory community is largely unaware
of the risk-management benefits of energy-efficient
technologies. Insurers interviewed by the Iowa Department
of Natural Resources cited difficulties in gaining
regulatory approval for premium credits as a key
barrier; they also cited concern about being forced
by ‘‘environmental organizations’’ to offer credits
(IDNR, 2000).
Table 5
Barriers to increased insurer involvement in energy sustainable energy markets
Technical issues
Lack of quantitative documentation of benefits and uncertainties
Insurer involvement in technology and R&D is limited in many cases
Solated adverse side-effects of improperly applied energy-efficient technologies
Nature of the insurance industry & marketplace
Fragmentation—many types of insurers, each with different needs
Difficult history with environmental issues, exemplified by Superfund litigation
Regulatory hurdles to innovation, rate changes, etc.
Energy/environment community perceptions of insurers
Perception of insurers as a ‘‘cash cow’’ with unbounded financial resources
Poor understanding of howthe insurance business works
Assumption that insurers will instinctively promote sustainable energy to battle climate change
Insurer perceptions of energy/environment community
Adversarial history between environmentalists and industry
Perception that sustainable energy is being used as ‘‘Trojan horse’’ by climate change advocates
E. Mills / Energy Policy 31 (2003) 1257–1272 1269
3.3. Energy/environment community perceptions of
insurance industry
Another set of barriers are inadvertently created by
the energy and environmental community’s perception
of insurers as a ‘‘cash cow’’ ready to reward efficiency
and renewable energy projects with deep premium
credits, grants, etc. While the insurance industry has
enormous revenues, its ability to allocate monies to new
and high-risk ventures outside of the core business is
highly limited. Moreover, as mentioned above, the
industry has become increasingly competitive, which
has translated into premium and profit reductions. The
so-called ‘‘soft market’’ conditions of the past two
decades—and recent losses from 9/11—have made it
particularly difficult to implement newpremi um credits
to promote the use of newtechnol ogy.
The energy/environmental community also has a poor
understanding of the insurance business. This makes it
difficult to craft propositions that make real business
sense for insurers. Considerable discussion of this is
provided by Mills et al. (2001).
There is also a growing perception that insurers will
automatically and instinctively promote sustainable
energy projects because it will reduce greenhouse gas
emissions and thereby lower the risk of weather-related
natural disasters. While there are well-documented
connections between extreme weather events, global
climate change, and insurer vulnerability (Vellinga et al.,
2001; Cohen et al., 2001), remaining uncertainties—
amplified by exclusive atmospheric science jargon—
paralyze most insurers. Moreover, the prospective
benefits would manifest well into the future, far ahead
of the short financial planning horizon of most
insurance interests. In addition, the government sector
provides a limited buffer through its flood and crop
insurance programs, disaster relief, etc. While the
specter of climate change has motivated some farsighted
and proactive insurers to pursue sustainable
energy technologies, ‘‘Mainstreet’’ insurers have been
slowto assume this perspective (Mills et al., 2001).
3.4. Insurance industry perceptions of energy/
environment community
There are also barriers inherent in insurance community
perceptions of the energy/environmental community.
History has often evidenced an adversarial
relationship between non-governmental organizations
and insurers, as seen in the cases of Superfund cleanup
litigation and asbestos abatement. In the case of energy,
it is far more likely that non-governmental organizations
would prefer to operate as allies of the insurers, but the
historical perception must be recognized and overcome.
Lastly, emphasis on sustainable energy technologies
may come to be viewed as a Trojan Horse for
politicizing insurers around the climate change issue
(Mills et al., 2001). This perception can distract insurers’
focus on the direct and meaningful relationship between
certain efficiency or renewable energy measures and risk
management, such as property protection, or indoor air
quality enhancement. One attempt at using climate
change to enlist insurers as supporters of energyefficiency
building codes (with no mention of the riskmanagement
dimension of energy efficiency and renewables)
revealed considerable puzzlement, disinterest, and
distrust on the part of insurers (IDNR, 2000).
4. Conclusions
There is tremendous promise for insurers to become
more involved in the energy efficiency and renewable
energy marketplaces. Early precedents illustrate the
wide array of ways in which insurers have already
participated, but barriers also remain.
It is somewhat curious that the European insurance
community—which is generally considered to be more
advanced in efforts related to global environmental
issues—appears to be less active in the practical
promotion of energy efficiency and renewable energy.
Note that most of the examples in Table 3 are from USbased
insurers. The UNEP insurance group—an assembly
of the most environmentally aware insurers from
around the world—has given only glancing attention to
the above-mentioned synergisms offered by energy
efficient and renewable energy technologies.
The challenge is to continue to identify and articulate
the ways in which energy efficiency and renewable
energy can moderate or prevent insurance losses, and to
make the business case for howsusta inable energy
technologies can improve the competitive advantage of
insurance and risk management firms. To be successful,
sustainable energy technologies must address acute
strategic issues faced by these industries. A good
example is the rapid growth in indoor air quality claims
and construction defects litigation haunting many
insurers; many of these claims trace back to bad design
and application of energy-related systems. The growing
insurance risks associated with electricity reliability are
another example, which can be addressed, in part,
through efficiency and distributed renewable energy
supply solutions.
There is, also, considerable scope for a more diverse
set of industry actors (agents, brokers, underwriters, risk
managers, trade associations, and executives) to be
educated and involved in assessing and implementing
the opportunities. While insurance regulators and policy
makers have yet to focus on the issues, their participation
is very much on the critical path to more broadbased
innovation in this area, and their absence from
discussions thus far is unfortunate.
1270 E. Mills / Energy Policy 31 (2003) 1257–1272
Acknowledgements