Insurers reward eco-friendly clients.

Risk managers may be able to save insurance dollars by encouraging their companies to go green.

A growing number of insurance companies are developing insurance and risk-management products for the low-carbon economy.

Earlier this year, St. Paul Travelers Cos. introduced a new program to offer a 10% discount to drivers of hybrid-electric vehicles. In May, American International Group Inc. announced it was developing a number of products, including coverages for the carbon trading market, as part of a corporate effort to confront climate change.

Fireman's Fund Insurance Co., a subsidiary of German insurer Allianz S.E., is the latest U.S. insurer to enter this arena. Recently, it introduced a series of coverages for buildings that are green-certified, as well as for those with owners who would like to capture green benefits. Before a building is certified as green, it must go through a process called commissioning by a certifying organization. This process involves a professional engineer overseeing the installation and operation of all of the building's systems to ensure that the materials are more energy efficient and environmentally friendly.

Steve Bushnell, a product manager at Fireman's Fund, said studies show tenants in green buildings enjoy lower absenteeism, higher productivity and higher retail sales. "From a building owner standpoint, having a green space is a very positive force in the marketplace, and Fireman's Fund believes that if our coverages are going to address those needs, we're going to expand our market share. Also, green buildings are better to insure, have less risk than traditional buildings, so it's going to improve our profit position as well."

So far, the reaction to Fireman's Fund's green coverages has been swift and positive, Bushnell said. "This is very exciting to us, because we haven't even launched the product yet. We've made our filings, and about 30 states have approved us"

Europe's transition to a low-carbon economy has been more robust than that in the United States. Indeed, Lloyd's, Munich Re and other reinsurers long have been innovating products for this segment. Of the products currently on the market, carbon delivery guarantee insurance has had the most success globally.

This coverage is designed for greenhouse gas emissions-reduction projects in developing countries, and the reductions then become recognized as credits under the emissions trading market in Europe and the Kyoto Protocol. The insurer acts as the guarantor of the credits, known as Certified Emissions Reductions, and pays financial compensation in case these credits aren't granted by a governing board according to agreed terms and conditions.

Reinsurance giant Swiss Reinsurance Co. was first to complete one of these transactions this year when it issued the coverage for a landfill gas project in South America. This project involved technology to capture and destroy methane from the environment through holes in the ground. The insurance policy issued by Swiss Re focused on the Kyoto Protocol risk; that is, it covered the registration of the project and the issuance of the CERs, said Ben Lashkari, head of emissions at Swiss Re's environmental and commodity markets.

Since that first deal, Lashkari says demand has been high without any active marketing.

The carbon market in the European Union alone is projected to reach $30 billion by the end of this year, according to reports. That figure will increase significantly when the commitment period under the Kyoto Protocol takes effect in 2008, and corporations begin to receive emission credits for carbon-reduction projects, Lashkari said. "Currently, credits are in high demand by the European countries, with most of the activities on the buy side in Europe and activities on the sell side in Asia and South America," he added.

Allianz, Fireman's Fund's parent, will be looking to introduce the green-build coverages on a global basis, Bushnell added.

Loss-Risk Management Notes is compiled by Senior Associate Editor Meg Green.

Carbon Dioxide Emissions

Top 5 countries, plus the United States, ranked by 2003 metric tons of
carbon dioxide emissions per capita, * compared with 1990 emissions.
The United States is ranked 10th.

                            1990             2003

 1. U.S. Virgin
    Islands                 81.7            121.3

 2. Qatar                   26.1             63.1

 3. United Arab
    Emirates                29.3             33.6

 4. Kuwait                  21.1             31.1

 5. Bahrain                 23.8             31.0

10. United States           18.9             19.8

* The per capita rankings reflect the pollution level of individual
countries when taking into account its population, that is, how much
each citizen contributes toward carbon dioxide emissions. In terms of
pure CO2 production, the United States and its territories contribute
24% of the world's emissions. The European Union contributes 15.3%.

Source: U.S. Department of Energy

Note: Table made from bar graph.