Climate Change & Green Energy: Insurance Report
By Michael Giusti
As climate change continues to develop and impact our world, the insurance industry is changing along with it. In many areas, such as homeowner’s insurance, policies are getting more expensive and harder to find. But in other areas, the climate revolution is presenting opportunities for new lines of business and new ways for policyholders to protect themselves and avoid risk.
In this 2024 Climate Change, Green Energy, and Insurance Report, we will detail many ways those areas intersect and overlap, as well as the opportunities and risks that this changing environment may present.
The Climate Effect
The most simple way to put the interaction between the climate and the insurance industry is that with rising levels of carbon dioxide, and with rising global average temperatures, comes a bigger chance for major losses.
Insurers thrive on predictability. Their business models largely depend on looking at the past and using that data to predict future losses. But with rising global temperatures, the scientific community agrees that the chance for more extreme storms is becoming more likely than in the past.
Reinsurance companies are on the front line of that risk. Reinsurance companies are the giant multinational insurers that protect other insurance companies from catastrophic losses. These reinsurance giants have exposure across the globe and everything from climate change to wars and even shipping catastrophes influence how much they have to pay out.
When reinsurers issued their new quotes in January, many policies suffered from some sticker shock — the underlying cost to offer nearly every kind of insurance policy stands to go up in the next few years.
That said, the hikes were not universal. Areas with less climate-exposed risk didn’t see the double-digit increases that the more at-risk communities felt. And some lines, such as auto and health insurance, are less dependent on the reinsurance industry for rate setting.
Individual action
Homeowners and businesses aren’t taking the risk of climate change lying down. Many are investing in areas meant to reduce their carbon footprint. And with those investments comes the need to make sure the new investments are protected by insurance.
The federal government offered a series of tax credits in the Bipartisan Infrastructure Law and the Inflation Reduction Act meant to encourage homeowners and businesses to invest in carbon-reducing technologies.
New investments in many areas are now eligible for generous tax rebates including:
- Solar panel systems
- Battery backup systems
- Wind power generation
- Electrical upgrades
- Window and door upgrades
- Heat pumps
- Electric vehicle chargers
How those upgrades are insured often comes down to where and how they were installed. If a homeowner installs the solar panels on their primary residence, and it is permanently affixed, it will generally be covered by the homeowner’s policy. The same is true of nearly all of those upgrades, but it isn’t universally true.
With some products – such as solar panels or backup batteries, some insurers are balking at covering them and are writing exclusions into their policies. The insurers worry that the addition of a solar system, for example, may introduce a new windstorm or hail hazard, and they are specifically excluding them.
If the homeowner’s policy excludes a green upgrade but the homeowner wants to go ahead anyway, many green developers will let the homeowner lease the panels or batteries instead of buying them. Leasing shifts the insurance burden onto the leasing company instead of the homeowner.
But, unless the policy has a specific exclusion, anything permanently affixed to the primary residence would be covered by the homeowner’s policy.
If it is instead permanently affixed to a separate structure – such as a detached garage or a shed – it would still get covered, but at the lower limit that applies to the detached structure – generally 10% to 20% of the coverage of the main structure.
If the upgrade is a stand-alone upgrade – such as a wind generator that is on freestanding pole, or a solar array built on the ground – then those won’t automatically get covered and will need some extra rider or floater or even a separate policy to ensure it is covered.
If the upgrade project wrapped in things like windows or a roof, it might actually net a reduction in premiums. For example, if a homeowner decided to upgrade their roof before putting on new solar panels, that new roof would net a lower premium. And if they made sure to use special armoring, such as hurricane straps, while the roof was being rebuilt, those savings would be even bigger.
The same goes for new windows. If the homeowner opts for functioning storm shutters or impact-resistant windows, the homeowner’s insurance premiums may come down even further.
And while electrical upgrades don’t necessarily warrant discounts in themselves, in some cases insurers will opt to pass on covering an older home with questionable electrical or an outdated main electrical panel, so taking advantage of the federal incentive to upgrade the electrical service could pay off in terms of premiums in the long run.
If the upgrades increase the value of the home, the policyholder needs to make sure the policy reflects that higher value.
Many insurers also are offering a green rebuild rider for their homeowner’s policies. These are clauses in the insurance contract that says that if there is a loss, the policy will pay a higher rate to ensure the rebuilding materials and techniques are done to green building and sustainable standards.
Business policies
Homeowners aren’t the only ones getting insurance for their green investments. Solar, wind and battery developers have long been getting policies to cover their projects, but a new policy is emerging that would also cover the risk to a solar developer of the sun not shining enough to return an investment for a solar project.
Called parametric solar insurance, these are insurance contracts that set a minimum amount of solar energy expected to be produced, and they step in and reimburse the developer if the amount of energy falls short of their projections.
Also on the developer end, there are great insurance products designed to protect large arrays from damage from things like hail or windstorms. Other policies are written specifically for green energy installers.
Developers aren’t the only businesses looking at green energy policies. Questions come in with other scenarios, such as a smaller installation on top of a big box store or a storefront.
Businesses may be tempted to install solar arrays, battery backups, electric vehicle chargers, and other green upgrades to reduce their carbon footprint and attract new customers.
The question of how those investments can be insured is worth a conversation with an agent.
If the business owns the property where the upgrades are being installed, then the business’ commercial property or business owner’s policy may cover them, but it is important to discuss coverage limits and exclusions with the agent.
If the building is leased, who needs to provide the insurance coverage gets trickier.
Regional complications
Climate risk isn’t spread evenly across the country, and neither are the complex issues facing the insurance industry.
In the West, wildfire risk as well as the risk of flash flooding from atmospheric rivers has been playing havoc on insurers in places like California and Arizona, and even Colorado.
California in particular is facing a mass exodus of major insurers willing to write homeowner’s policies in the state.
In the Gulf South and the Eastern Seaboard, hurricanes have been driving insurance markets to the point of crisis, particularly in Florida and Louisiana.
Less well publicized, but still stressing the system are hail- and tornado-prone areas of the Midwest.
With large commercial insurers pulling back in many markets, homeowners are faced with few options. In many cases their only choice is to buy a costly and unregulated homeowner’s policy on the so-called surplus market. While it may be possible to get coverage through this route, it also means that if there was a catastrophic loss that drove the surplus line out of business, the homeowners would not be protected by the states’ insurance backstops.
The only other option in many cases is to opt for the state insurer of last resort – often called the Citizens or Fair plan. These policies are given by the state and are, by design, the costliest policies available. But with no other option, those insurers of last resort are seeing their rolls swell.
Some states are working on legislative and regulatory fixes to tempt insurers back into their markets.
California, for example, is considering offering to let insurers use future computer modeling to help set their premiums. This is a common practice in much of the country but is outlawed in California because of the opaque nature of many of these models. For their part, insurers say without predictive modeling, they will be left flat footed for future costlier losses that wouldn’t have shown up in the historical data they were forced to use.
Florida is focusing on limits for its how homeowners can sue their insurers. And Louisiana is offering grants to insurers incentivizing them to pick up policies from the state insurer of last resort.
Whether these changes will be sufficient to keep state insurance markets from teetering on collapse remains to be seen.
Electric Vehicle Revolution
There has been a flood of bad press dunking on the idea that there are electric vehicles piling up on dealer’s lots. But the reality is that electric vehicles, and especially plug in hybrid electric vehicles, are setting sales records and represent the fastest growing area of the market.
Auto makers have leaned in hard by offering many new electrified models, and the federal incentives for new and used EVs have become more clear.
People who have made the switch to an electric vehicle are often the best ambassadors for them. For example, they are often quick to point out that the cost to operate an EV is about 4 cents per mile, compared with a typical gas vehicle of 14 cents. Meaning EVs are more than three times as efficient per mile as a gas vehicle. And after tax credits, it becomes quickly less expensive overall.
There are still drawbacks for electric vehicle adoption. For example, while EVs do need specialized mechanics to do their service, an EV does need many fewer service intervals. EVs don’t need 10,000 mile oil changes, but they do need to rotate their tires regularly. The bottom line is that the electric motors with their fraction of the number of moving parts compared with a gas engine are very low maintenance.
Another drawback, for now, is that insurance costs can be a bit higher for EVs because of those specialized mechanics and slightly higher sticker prices. But the spread between the cost to insure an EV and a gas engine isn’t nearly as wide as it was a decade ago.
Big picture takeaway
The bottom line for the insurance industry is that as the climate is changing, the insurance industry continues to be susceptible to natural disasters. Other non-climate challenges are also still weighing on the insurance industry – such as the bridge disaster in Baltimore that promises to drive up the cost of automobiles, not to mention the direct losses that will have to be paid out following the bridge collapse and business interruptions that are following.
There is also a question of whether the green energy market itself can keep up with the growing demand for things like solar installations and wind power. Headwinds there include continued supply chain disruptions and the workforce’s ability to keep up with the growing demand.
But for their part, reinsurance giants appear to be behind the expansion of capacity of green insurance.
So, as society shifts to face the climate reality, the various aspects of the insurance industry are also shifting to make sure the investments and risks are accounted for.
Michael Giusti, MBA, is senior writer and analyst for InsuranceQuotes.com
