Has anyone looked at their home insurance renewal lately? It is ugly. Premiums are going through the roof—even in lower-risk areas. Increases are being driven by many more claims from severe weather events brought about by climate change and higher rebuild costs. As I write this, wildfires are ravaging parts of the western U.S. and Canada. Insurers are abandoning some states altogether because of the rapidly escalating risks. And it is only going to get worse.
In 2023, the Associated Press reported that two large insurance companies pulled out of California entirely because of the increasing risk of wildfires and construction costs.
Home and building owners in Florida face similar issues because of the increased severity and number of hurricanes. Some reports suggest that challenges in the cost and availability of insurance are driving Floridians to sell up and relocate.
It was reported recently that home prices were dropping in New Orleans—a welcome relief to new home buyers. Not so fast. Apparently, this drop was caused by the significant increase in home insurance, negatively impacting overall affordability.
Even in low-risk areas, insurance agents report that some insurers are now refusing to insure homes with roofs that are older than 10 years. Since mortgage issuers require homes to be insured, and most of us need mortgages to afford to buy a house, does that mean owners will be forced to replace their roofs every 10 years, as opposed to typically every 20 to 30 years? That is both expensive and carbon-intensive–an example of an unintended consequence of climate change that will only serve to accelerate warming yet further.
Climate Change Is Causing Increasingly More Economic Damage
According to the European Copernicus Climate Change Service, Sunday, July 21, 2024, was the hottest day recorded on Earth (by humans).
Data from the National Oceanic and Atmospheric Administration’s (NOAA) National Centers for Environmental Information (NCEI) show that severe weather events have risen steeply.
The graphs below show the increase in the frequency of severe weather events (heat waves/droughts, flooding, freeze events, severe storms, hurricanes, wildfires, winter storms) in the U.S. that result in damage worth more than one billion dollars ($1B). It is clear why insurance claims have been on the rise: The frequency of these damaging events has increased by more than 500% in the 2020s compared with the 1980s. In this decade, currently, approximately 21 damaging weather events causing more than $1B in damages are expected each year, compared with just over three annually in the 1980s. The annual costs from these events have risen fivefold from $22B to $120B annually, and that does not include the impact of human lives lost and the toll on both mental and physical health.
Moody’s Analytics data shows how the rapid increase in insurance premiums has correlated with the increase and frequency of these $1B-plus events, which can also be seen from the data in Figures 1 and 3. Increasing insurance costs, as well as the cost of repairing damage from climate events, are examples of the social cost of carbon emissions (SCC). This is an example of why, when looking at payback on improving envelopes in buildings and the cost-effectiveness of increasing energy code stringency, SCC should be used as the cost savings baseline, not just straight energy savings.
What Should Insurance Companies Do?
Insurers already credit homeowners with emergency generators, new roofs and backup sump pumps, for example. Insurance companies can be argued to have a long-term business interest in slowing climate change and encouraging their policyholders to invest in climate adaptation strategies for their homes and buildings.
Slowing climate change by reducing carbon emissions will reduce the acceleration in the number and severity of climate events, reducing insurers’ financial risk. Making structures more resilient to severe weather events also minimizes damage and consequential economic losses.
The European insurance industry is already discussing needed changes. In a report commissioned by ClimateWise, a group representing some of the leading global insurance industry organizations, and completed by Deloitte, it lays out the need for innovation in the insurance industry to:
- Incentivize policyholders to decarbonize their buildings and activities;
- Underwrite to encourage net-zero carbon strategies in business activities, lifestyles, technologies, etc.; and
- Decarbonize their own operations.
The report notes, “Opportunities exist through the design and pricing of policies, claims and risk advisory services to incentivize climate mitigation and to support the growth of low carbon solutions that support and accelerate the transition towards net zero.”
It also recommends insurers have programs that encourage policyholders to build back after damaging climate events using sustainable materials and to high-efficiency standards.
Additionally, the report asserts that the insurance industry should play an active role in supporting technology innovation for net-zero emissions to help mitigate technology start-up and deployment risks. In this way, the report states that the insurance industry can “provide confidence to investors, banks and project developers to explore and provide capital towards net zero technologies and companies, by de-risking the opportunities.”
It also notes that “the [insurance] industry’s deep risk expertise can also be used to reduce the risk in the development and deployment of net zero technology, from innovative construction methods through to new manufacturing processes.”
The Dual Impact of the Building Envelope
Building envelopes are at the nexus of climate change mitigation and adaptation. High-performance building envelopes reduce energy use (and carbon emissions) in buildings. They are also key to creating climate-resilient buildings, whether by maintaining a human-survivable environment inside during a power outage or by protecting occupants and structures from wind or water damage. Energy-efficient building envelopes also reduce loads on the electric grid, supporting grid resilience and building electrification strategies.
It makes sense that insurers should reward and incentivize building owners who invest in high-performance, energy-efficient building envelopes and be open to underwriting high-performance technology deployment.
Insurance Opportunities
In a blog last year, I made the case for insurance to underwrite the risk of implementing new, high-performance façade components and systems. Risk aversion is significant in both designers’ and installers’ approaches to design and construction—understandably because any problems with the building envelope are typically costly to mitigate. However, such risk aversion perpetuates “rinse and repeat” low-performance specifications, which do not support the needed transformation in building envelope construction.
A recent report by the Façade Tectonics Institute (to be published shortly) has identified several ideas that would reduce the implementation risk of high-performance façade systems or reduce the cost of ownership of buildings using high-performance façades:
- Reduced building insurance premiums for owners who invest in high-performance envelopes;
- Insurance for glazing contractors and/or general contractors to help manage risk related to schedule, product performance and durability of using new high-performance products; and
- Insurance for new products to provide stronger product warranties and protect the manufacturer and/or downstream purchasers from other potential liabilities.
Since product manufacturers can already buy insurance for extended warranties for existing products, it may be possible to insure new products with sufficient testing and validation.
How Is Sufficient Testing and Validation Defined for New Products?
Interestingly, there is already precedent for defining sufficient testing and validation: In France, new building products go through a technical evaluation (Avis Technique) by the Scientific and Technical Center for Building (CSTB). The CSTB completes a thorough product review, sometimes identifying additional testing requirements. It also assesses the suitability of the products for the application. This process is a critical part of reducing the risk barrier to the adoption of new construction technologies.
The CSTB documentation states that its technical evaluation allows “recipients to rely on an objective, recognized, collegial technical assessment even though such products or systems have not yet fallen within the traditional domain.” This assessment is often the gateway to using new products on construction projects in France, as it is frequently requested by building project insurers and gives owners and contractors comfort in a robust third-party evaluation.
Increasing the climate resilience and mitigation performance of our homes and buildings is critical for our health and safety, as well as our financial well-being. The increase in insurance policy costs and reduced insurability is unsustainable. The insurance industry appears to be poised to embrace its unique role in promoting low-carbon emission buildings and accelerating the adoption of net-zero technologies. Engaging with the insurance industry represents an opportunity to find levers to drive the adoption of high-performance façade systems and components.