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How Insurance Has Become a Well-Spring of Green Innovation

We all know the saying: adversity begets opportunity. Today, the insurance industry is heeding that idea and discovering that hurricanes, among other climate adversities, can create innovation -- and revenue.
by Mindy S. LubberHarvard Business Review Posted on Sep 15, 2008

We all know the saying: adversity begets opportunity. Today, the insurance industry is heeding that idea and discovering that hurricanes, among other climate adversities, can create innovation -- and revenue.

Stung by record losses from Hurricane Katrina and a wave of other devastating storms that continue now, the insurance industry is recognizing the reality of global climate change. While the specter of more extreme weather events -- whether from stronger hurricanes, more damaging wildfires or prolonged droughts -- has convinced some insurers to pull the plug on providing coverage in vulnerable areas, many others are seizing the moment by developing new products and services that will reduce losses for both customers and themselves. Examples range from green building design and hurricane-resistant construction to weather derivatives such as drought insurance and wind insurance.

(A more extreme example: insurance giant AIG sends private fire-fighting forces into the teeth of California wildfires to spray fire retardant on homes of of high-end clients.)

A recent Ceres report, "From Risk to Opportunity: Insurer Responses to Climate Change," identified 422 innovative products, services and activities from 190 insurers and brokers in 26 countries, with 40 percent of those services coming from US companies. That's more than double the 192 products and services that were identified in a similar report done by Ceres in August 2006.

What's most striking in the report's findings is that many of the products are simultaneously reducing losses and reducing global warming pollution.

Progressive and GMAC Insurance are offering pay-as-you-drive insurance which rewards consumers for driving less. Still in their infancy, these programs have huge potential to cut U.S. emissions. A report by the Brookings Institution's estimated that if all motorists paid for accident insurance per mile driven rather than in a lump sum, driving would decline by about eight percent nationwide. That means fewer accidents and lower accident claims.
It also translates into a two percent reduction in CO2 emissions and a four percent drop in oil consumption - a far-bigger step towards energy independence than we'd likely see from expanded off- shore drilling.

Insurers are also making inroads into fast-growing renewable energy and carbon emissions trading markets. London-based Willis Holdings, for example, has launched a product to cover potential underproduction of power from wind farms. AXA provides comprehensive insurance coverage for wind farms, which is generating nearly $15 million in annual premiums in Germany alone.

These kinds of products reinforce the realization that environmental issues that were once considered as extraneous are actually key financial considerations. And this trend cuts all across the economy, whether for homebuilders such as KB Home and Centex, which are integrating energy efficiency into their new homes, starting in 2009, or U.S. and foreign automakers which are scrambling to beat the pack in providing smaller vehicles and hybrids that use less gas and emit less pollution.

So some shortsighted companies may call it adversity, but it's the smart ones who call it money-making.

Let us know about other unusual products and services you're seeing from insurers and other sectors that seize on climate change and other environmental challenges.

Mindy S. Lubber is president of Ceres, a leading coalition of investors and environmental groups working with companies to address sustainability challenges such as global climate change.
Mindy S. Lubber

Read the post at Harvard Business Review

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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