Top 10 Business Risks

Sustainable Buildings and Insurance

Patricia M. Arnold, CPCU, ALCMspring 2009

ARC 386M: Building-integrated Photovoltaics

Your SpeakerAbout your speaker: Patricia M. Arnold, CPCU, ALCM…

• Pat presently teaches undergraduate Risk Management & Insurance courses for the UT Austin McCombs School of Business. She spent over thirty years as an insurance professional, including management and field positions in underwriting.

• Pat worked for 29 years for State Farm Fire and Casualty in a variety of positions - management, field underwriters, leader in their Bloomington, Illinois corporate training program. The training position involved designing and teaching coverage forms and underwriting guidelines in all personal and commercial lines classes. She assisted in regional audits, and designed an intranet for underwriters, writing all policy contract related content. Subsequently she moved to Texas, revamping the Internet presence for the Independent Insurance Agents of Texas, particularly their policy analysis and agency operations materials.

• Pat holds two designations – CPCU (Chartered Property Casualty Underwriter, and ALCM (Associate in Loss Control Management).

• Areas of special interest include sustainability, eCommerce, and complex legal liability issues facing businesses, such as enterprise risk management, governance, and public policy.

Slideshow overview1. Resources and background – what is the risk?

a. People & Values b. Markets - resources & concentrationsc. Legal - liability & fiduciary dutyd. Public policy – legislation and regulation & taxation

2. How is the industry responding? Financial, enterprise, hazard, & market risk…

Corporate Social Responsibility AND the bottom line

What is…• Risk management• Insurance

And why does the insurance industry care? resilient buildings sustainable buildings

Handouts: “The Thin Green Line” & “Are You in the Red from Going Green?”Best Review 2007/8/9

“Of the approximately 200 homes that were previously standing in the area, 14 remain. Ten of those houses are Fortified.”

Insurers cite natural catastrophes and climate change as their biggest challenge for the future. In the context of current soft pricing levels, insurers are worried about the possible financial impact of a series of major events happening in quick succession. www.strategicrisk.co.uk

“We see rising claims due to natural catastrophesand have a vested interest in reducing global warming.Our industry has been at the forefront of this debatefor a long time.”

Clement B. Booth, Allianz SE Board member ~~~Allianz SE - Building a Sustainable Future

The cost of climate change• In the past 30 years there has been a 15-fold increase

in weather-related claims.• 40% of all damages that Allianz now pays out are due

to natural catastrophes.• Between 2010 and 2019, average losses for the insurance

industry could grow to US$41 billion per annum.

Allianz SE - Building a Sustainable Future - 2008_status_report.pdf

Dow Jones Sustainability Index

“Corporate sustainability is a business approach to create long-term shareholder value. Sustainability leaders embrace opportunities and manage risks which derive from economic, environmental and social developments. As the importance of these trends increases, a growing number of investors integrate economic, environmental and social criteria into their stock analysis and use sustainability as a proxy indicator for innovative and future-oriented management.”

Top 10 Business Risks – 2009

Marsh –The Green Built Environment – 2009

In the front line: The insurance industry’s response to climate change Financial Crisis and the State of the P/C Insurance Industry Challenges Amid the Global Economic Storm

Excerpts~~~~~~~~~~~~~~~~~~~~~

from E & Y http://www.ey.com/global/content.nsf/international/aabs_-_strategic_business_risk_report_2008

From Marsh http://global.marsh.com/news/articles/Green_Building/index.php

and From REO Researchhttp://www.climatewise.org.uk/storage/1250/co_gsi_climate_change_insurance_report.pdf

From iii.orghttp://www.iii.org/media/presentations/connecticut/

http://www.ey.com/global/content.nsf/international/aabs_-_strategic_business_risk_report_2008

http://global.marsh.com/news/articles/Green_Building/index.php

http://www.climatewise.org.uk/storage/1250/co_gsi_climate_change_insurance_report.pdf

http://www.iii.org/media/presentations/connecticut/

The Top 10 Business Risks


“radical greening”



2009 Ranking & comparison


“radical greening” now #4



Radical Greening

Private or public sector structures?When will businesses be directed to comply? Taxed? (or part of cap-and-trade system w/in industry?)




Insurance & Critical impacts


“radical greening” impacts insurance



Links: 2009 Business Risks evaluated against business objectives and value drivers


“radical greening”Impacts primary business objectivefulfillment



“Demand for energy services is still likely to double over the next two to three decades, with rising demand from developing

countries.”

pp. 17-21from E & Y http://www.ey.com/global/content.nsf/international/aabs_-_strategic_business_risk_report_2008

“radical greening” seen as “critical”



Risk quadrants & greening Oil and Gas





Risk quadrants & greening Insurance





Risk quadrants & greening Consumer products





Risk quadrants & greening Real Estate





Marsh –The Green Built Environment – 2009

• Potential design-related risks• Claims examples• Questions to resolve• Markets



Potential design-related risks:• Liability for the increased cost of certain types of damages,

such as lost profits, lost business opportunities, increased tax burdens, and energy costs

• Liability for warranting an outcome without having complete control over things such as construction means and methods and operation and maintenance

• Liability for structural problems and leaks associated with green roofs

• Lack of proper green experience and qualifications on the part of the design team

• Lack of control over material specifications and substitutions on the part of contractors

» Marsh –The Green Built Environment – 2009



Claims examples:

• Claim by developer against architect because building did not achieve LEED gold certification

• Claim against architect and structural engineer due to water infiltration from green roof

• Claim against design team because cork flooring they specified resulted in water retention and mold

• Claim against architect because lack of green product availability caused project delays

• Claim against architect because health problems of tenant’s employees increased despite warranties that the indoor air quality would improve

» Marsh –The Green Built Environment – 2009 – as of May 2008



Questions to resolve• Markets• Contractual risk allocation• Bonding• New (evolving) professional liability exposures

• Underwriting criteria?• Pricing?• Builders’ risk terms? (standardization? comparison ?)

• Availability? (exacerbating existing market schisms: coastal)



Markets *• Zurich• Travelers• ACE• Fireman’s Fund• Lexington• Liberty Mutual• FM Global (Factory Mutual)• AIG• Lloyds of London• XL Insurance • Chubb• CNA• Arch

* Varies - some offer design firm professional liability, property, liability, environmental, builder’s risk, surety



In the front line: The insurance industry’s

response to climate change

• Ripple effect throughout the economy and across our investment portfolios

• More frequent and severe extreme weather events, events…put insurers in the front line of the storm

• Climate change will affect the very foundations of the insurance industry

REO Researchhttp://www.climatewise.org.uk/storage/1250/co_gsi_climate_change_insurance_report.pdf


In the front line: The insurance industry’sresponse to climate change

• Insurance is a major global industry, and one that directly affects F&C as a major asset manager. Not only do we invest in insurance companies; every company we invest in requires insurance to run its business. We could say, then, that the impact of climate change on the insurance sector will have a ripple effect throughout the economy and across our investment portfolios.

• There is overwhelming scientific evidence that climate change is contributing to more frequent and severe extreme weather events, events that put insurers in the front line of the storm. Natural catastrophes such as hurricanes in the US, recent floods in the UK, and wildfires in Greece have been exacerbated by the changing climate and led to record claims across the insurance sector.

• Beyond higher claims, though, climate change will affect the very foundations of the insurance industry, including how it is regulated, what kinds of capital requirements are in place, and how it evaluates and prices underlying risk.

• The sector needs to prepare itself for these fundamental changes.



Encouraging examples, but…

We note in this report some encouraging examples of good practice, where insurers are responding to climate-related risks and capitalizing on opportunities. But across the industry as a whole, the response to climate change does not yet reflect the scale of the challenge. In part, this is because there is still a good deal of learning going on – climate science continues to evolve, and government regulation and customer preferences alike are shifting fast



Executive Summary



Financial Crisis and the State of the P/C

Insurance Industry Challenges Amid the

Global Economic StormRobert P. Hartwig, Ph.D., CPCU, President

Insurance Information Institute 110 William Street New York, NY 10038Tel: (212) 346-5520 [email protected] www.iii.org

Informational Hearing of the Connecticut Insurance and Real Estate CommitteeHartford, CT

January 6, 2009



Challenges Amid theGlobal Economic Storm

• ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q3

• U.S. Insured Catastrophe Losses• U.S. Policyholder Surplus: 1975-2008



-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q3

*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry fell well short of is cost of capital in 2008

-13.

2 pt

s

US P/C insurers missed their cost of capital by an average 6.7

points from 1991 to 2002, but on target or better 2003-07

-1.7

pts

+2.3

pts

-9.0

pts

The cost of capital is the rate of return insurers need to

attract and retain capital to the

business

-9.7

pts

32

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$6.7

$24.

9$1

00.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

08**

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on PCS data through Sept. 30. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2008 CAT losses already exceed 2006/07 combined. 2005 was by

far the worst year ever for insured catastrophe losses in the

US, but the worst has yet to come.

$100 Billion CAT year is

coming soon

33

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

U.S. Policyholder Surplus: 1975-2008*

Source: A.M. Best, ISO, Insurance Information Institute. *Towers Perrin estimate as of 12/31/08

$ Bi

llion

s

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Actual capacity as of 9/30/08 was $478.5, down 7.6% from 12/31/07 at $517.9B, but 68% above its 2002

trough. Recent peak was $521.8 as of 9/30/07. Estimate as of 12/31/08 is $438B is 16% below 2007 peak.

The premium-to-surplus ratio stood at $0.94:$1 at

year end 2008, up from near record low of $0.85:$1 at

year-end 2007

34

The green building movement is not confined to new construction. Indeed, the process of retrofitting existing buildings and seeking Leadership in Energy and Environmental Design (LEED) certification has its own designation by the U.S. Green Building Council (LEED-EB). More and more, property owners are seeking LEED certification in conjunction with such retrofits.

This gives rise to various risks that building owners should be aware of when contracting with design professionals, construction managers, and contractors for a "green" retrofit of their buildings

RISK TIP: BE PREPARED WHEN "GREENING" EXISTING BUILDINGS

RISK TIP: BE PREPARED WHEN "GREENING" EXISTING BUILDINGS

The green building movement is not confined to new construction. Indeed, the process of retrofitting existing buildings and seeking Leadership in Energy and Environmental Design (LEED) certification has its own designation by the U.S. Green Building Council (LEED-EB). More and more, property owners are seeking LEED certification in conjunction with such retrofits. This gives rise to various risks that building owners should be aware of when contracting with design professionals, construction managers, and contractors for a "green" retrofit of their buildings. Below are some tips to be considered:

* Be sure to thoroughly discuss the scope of the project with all those involved prior to drafting plans, specifications, and contracts. Pay particular attention to which existing building systems will remain, which need to be upgraded and how, and which need to be completely replaced.

* The LEED certification system has four levels: certification, silver, gold, and platinum. The level is dependent on seven prerequisite points and 69 elective points. Be sure to agree ahead of time with potential design professionals, construction managers, and contractors on which level of certification you are seeking and which building systems need to be retrofitted to attain those elective points.

* Be conscious of the cost of replacing or upgrading certain existing systems versus the long-term financial benefits that will be attained by virtue of reduced energy costs.

* Be sure to retain a design professional with a background in LEED certified projects at the contract and the contract document stage. Design specifications should clearly define individual responsibilities for the construction manager and contractors in regard to building the project in accordance with plans and specifications.

* Ensure that the contract clearly specifies who is responsible for LEED certification and the ramifications for not achieving it.

* Be wary of the difference between design specifications and performance specifications. Generally, if a building is retrofitted in accordance with the owner supplied design specifications, the contractor will not be held responsible if that building fails to meet performance specifications.Owners should be confident that their design professionals have developed a design for the retrofit that is attainable within a certain budget, and that such design will meet the desired certification.

The contract between owners and design professionals should clearly spell out the remedies for a breach. In addition, owners and their attorneys should be certain that the contract language calls for specified relief against contractors if performance specifications aimed at attaining a certain LEED certification level are not met.

By: Vincent P. Pozzuto, Esq., MemberCozen & O'ConnorNew Yorkmailto:[email protected]

mailto:[email protected]

Just as a company needs to measure its own costs and benefits of going green, insurers must understand and anticipate how these projects will affect the current insurance system, and develop policies and practices that support this burgeoning societal change.

Insight: In the Red from Going Green?

Commercial insurance carriers should develop policies and practicesto support clients that are becoming more environmentally friendly.

Source: Best's Review (December 2007 Issue)

Insight: In the Red from Going Green?Commercial insurance carriers should develop policies and practices to support clients that arebecoming more environmentally friendly.Source: Best's Review (December 2007 Issue)

You can't watch television, page through a magazine or read an annual report without learning about companies'efforts to "go green" or be more environmentally friendly. It's no longer just a lofty ideal--many companies nowhave tangible business goals aimed at reducing their carbon footprint and improving the environment.

The benefits of going green go beyond mere environmental improvements. In many cases, long-term benefits canbe achieved by installing systems that need less energy for heating, cooling and lighting and generally usesignificantly less water. Many materials and equipment used in green buildings are built to last longer and requireless maintenance. For many companies, going green makes financial, as well as environmental, sense.For insurance companies looking at prospective clients making environmentally friendly changes, it is imperativeto fully evaluate the exposures and corresponding insurance solutions these companies require and respondaccordingly.

Often the technology for achieving advancements in society is ahead of the potential hazards and exposuresthese achievements present. As an example, green roofing technology is becoming more prevalent in NorthAmerica. While using trees, soil and vegetation to reduce heating or cooling costs and pollution makes goodenvironmental sense, what are the insurance implications of a roof collapse or bug infestation? Earth, dirt and soilare generally not insured by standard property forms. Trees and shrubs are often excluded or given a smallsublimit on a named peril basis.

Geothermal heating systems also are used in many green buildings. Property and business interruption insurancetypically do not insure foundations, or property below the ground. If loss or damage to underground property is notcovered, then the business would not have protection in the event a break in the heating system interrupted theinsured's business activities.Insurers also need to keep in mind that new environmental codes may very well be included in the ordinance orlaw provisions of property policies. As government agencies adopt codes requiring buildings to become moregreen, the importance of these policy provisions become more significant. Like technology, laws and ordinancesmay be ahead of insurance policy language. It is important for insurers to know and understand the ever-changingcodes and determine how their insurance policies would respond.

The proper valuation of green buildings is especially important. Taking a look at the LEED (Leadership in Energyand Environmental Design) requirements and documentation for a green building, the items making a buildinggreen are generally unique--solar panels, energy- and water-efficient systems, organic insulation--and, therefore,may be more expensive to repair or replace. There also may be increased costs for hiring specializedprofessionals to ensure a green building is properly returned to its former state. Insureds may not remember toadjust their insurance limits, terms and/or conditions accordingly; therefore, ongoing dialogue with all partiesinvolved in the insurance transaction is paramount.

Just as a company needs to measure its own costs and benefits of going green, insurers must understand andanticipate how these projects will affect the current insurance system, and develop policies and practices thatsupport this burgeoning societal change.

(Steven R. Pozzi, a Best's Review columnist, is senior vice president, Chubb & Son, and chief underwriting officerfor Chubb Commercial Insurance. He can be reached at [email protected].)Copyright © 2009 by A.M. Best Company, Inc. ALL RIGHTS RESERVED

mailto:[email protected]

More Resources: On-Site Renewable Energy in Green Buildings: Case Study Compendium http://www4.uwm.edu/shwec/publications/cabinet/reductionreuse/RenewinLEEd%20CaseStudies%20March07_Approved%20by%20DOA2.pdfShades of Solar Facilities in Brighton, MA, Oberlin, OH, and Eugene, OR, use photovoltaics to harvest energy.http://www.architechmag.com/articles/detail.aspx?contentID=6510Foundation Walls: Putting Materials to the Test Thermal Barriers and Spray Foam: Clarifying the Issues - Closed Conditioned Crawl Spaces: Best Practices (Volume 3 In this issue: October 2007 – BLUEPRINT (Dow Chemical publication)http://www.dow.com/PublishedLiterature/dh_00b5/0901b803800b58c1.pdf?filepath=styrofoam/pdfs/noreg/179-07448.pdf&fromPage=GetDoc Allianz SE - Building a Sustainable Futurehttp://www.mccombs.utexas.edu/dept/irom/bba/risk/rmi/arnold/DOWNLOADS/2008_status_report.pdfSustainability Risk Management, Dan Anderson, PhD, CPCUhttp://gwfact.rso.wisc.edu/readings/Sustainability2.pdf World Business Council for Sustainable Development (WBCSD)http://www.wbcsd.org/templates/TemplateWBCSD5/layout.asp?MenuID=1 and Sustainable Development Facts and Figureshttp://www.wbcsd.org/DocRoot/I9Xwhv7X5V8cDIHbHC3G/WBCSD_Sustainable_Consumption_web.pdf IBHS – Fortified for Safer Livinghttp://www.disastersafety.org/videos/video_player.asp?id=2&bw=HB and Builder’s Guidehttp://www.disastersafety.org/resource/resmgr/pdfs/builders_guide.pdfGlobal Climate Change and Extreme Weather: An Exploration of Scientific Uncertainty and the Economics of Insurancehttp://server.iii.org/yy_obj_data/binary/773508_1_0/I.I.I.%20Climate%20Study.pdf•Insurance in a Climate of Change - The Greening of Insurance in a Warming Worldhttp://insurance.lbl.gov/opportunities.html•RIMS Strategic Session - Managing the Risks of Climate Changehttp://www.aig.com/aigweb/internet/en/files/RIMS%20AIG%20Strategic%20Session%202008_tcm20-70611.pdf

http://www4.uwm.edu/shwec/publications/cabinet/reductionreuse/RenewinLEEd%20CaseStudies%20March07_Approved%20by%20DOA2.pdf

http://www4.uwm.edu/shwec/publications/cabinet/reductionreuse/RenewinLEEd%20CaseStudies%20March07_Approved%20by%20DOA2.pdf

…Notable provisions of the recovery act include $5 billion for weatherization of more than 1 million homes, $8 billion for new high-speed rail systems, $4.5 billion for energy upgrades to federal buildings and $4.5 billion in federal matching funds to upgrade the nation's rickety energy grid.

The legislation did not include a national "renewable portfolio standard" sought by many environmentalists, which would have forced utilities nationwide to boost their use of clean energy. California is one of several states to adopt such measures. But the mandates are opposed by legislators from states that are heavily dependent on low-cost coal.

"There are a lot of roadblocks," said Stuart Bush, managing director of alternative-energy research at RBC Capital Markets. "The question is how much momentum [President] Obama has left after the stimulus" to keep pushing for such a change.

Though the stimulus package fell short of what some green advocates wanted, others were heartened. Speaking Monday in Los Angeles, former President Bill Clinton said it represented a breakthrough in U.S. energy policy.

http://www.latimes.com/business/la-fi-stimulus-green18-2009feb18,0,5194715.story Copyright 2009 Los Angeles Times

Stimulus package gives a boost to clean energy Among the incentives, the plan will allow developers of renewable-energy projects to

swap tax credits for cash grants. By Marla Dickerson February 18, 2009

http://www.latimes.com/business/la-fi-stimulus-green18-2009feb18,0,5194715.story

ConclusionsManaging Risks, Opportunities for the Insurance industry

•Reputational risk•Shareholder, clients, financial markets•Innovative products – differentiation

•Regulation – influence new mandates• Use of stimulus money – new energy policy at federal level• Tax credit , cap-and-trade• Effectively use capital markets (CAT bonds)

•Meaningful investment policy•Research for long-term results

Documents

Top 10 Business Risks