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The insurance industry is becoming increasingly interested in DE because distributed energy technologies can reduce insured losses as a result of power outages or power quality problems.
Power outages can trigger a variety of insurance claims from homeowners and businesses, including machinery breakdown, loss of property, additional living expenses, and business interruption, as well as claims by utilities for unserved energy. Even relatively short-lived electricity interruptions can interfere with the ability of businesses to provide customer service or sustain manufacturing processes, and they can lead to the loss of valuable computer data or merchandise, such as refrigerated pharmaceuticals or food products.
According to A Scoping Study on Trends in the Economic Value of Electricity Reliability to the U.S. Economy, a report by the Consortium for Electric Reliability Technology Solutions (CERTS), insurance risks related to power reliability are on the rise as electricity customers become increasingly vulnerable to power outages. These losses can be triggered by natural or manmade catastrophes or localized interruptions in the utility system. (PDF 644 KB) Download Acrobat Reader.
In 1992, Hurricane Andrew became the most destructive natural disaster in U.S. history, resulting in a total economic loss of $25 billion, and insured losses of $16 billion. The hurricane left about three million homes and businesses without electricity, and a significant portion of the insurance claims were for business interruption resulting from the loss of power.
Half of all property losses over the past 40 years happened in the past ten years. And these disasters are costing the insurance industry dearly. According to the Property Claims Service, insurers paid over $79 billion in catastrophe-related losses from 1989 to 1997.
The growth in weather-related disasters since the late 1980s has led some in the insurance industry to speculate that climate change could be playing a role and could exacerbate future losses. According to Dr Gerhard Berz, head of research for Munich Re, the largest re-insurance company in the world, "Climatic changes could trigger worldwide losses totalling many hundreds of billions of dollars a year. The burden of claims resulting from so-called natural catastrophes has already taken on dramatic dimensions." (February 2001 article in Britain's The Guardian newspaper.) As distributed energy technologies typically produce fewer greenhouse gas emissions than traditional power plants, they are viewed as having the potential to reduce weather-related losses in the long term
Regardless of the cause, on-site power systems reduce business vulnerability to disruptions in electricity service. And portable solar electric (photovoltaic) power systems can help disaster-relief efforts in areas where the utility service has been disrupted. Such systems can restore electricity supply to businesses and homes more quickly after hurricanes, floods or other disaster, reducing business interruption losses and claims for living expenses.
While distributed generation technologies have an obvious role in assuring a reliable power supply, other DE technologies also have a part to play in reducing insurance losses. Uninterruptible power supplies are used in commercial buildings to protect critical applications such as computer networks and security systems in the event of a power failure. Load reduction technologies, particularly energy efficiency measures, can also play a part in reducing insurance losses.
Energy Efficiency
"The global insurance industry faces great financial risks from natural disasters potentially caused by global climate change. ...Energy consumption is the largest contributor to global climate change, so promoting energy efficiency is a particularly promising strategy. ...Around 70 specific ways in which targeted energy efficiency improvements can translate into a reduced risk of insured losses have been identified."
— Evan Mills, "Going Green Reduces Losses," Reinsurance Magazine, March 1997.
These loss reductions are not dependent on the perspective that reduced energy consumption will mitigate climate change. The Hanover Insurance Company, for example, began giving a 10% reduction in insurance premiums to owners of energy-efficient homes in the early 1980s on the grounds that the heating systems would ignite less often, thereby reducing the risk of fire.
The Risk and Insurance Management Society has identified several ways in which energy efficiency measures reduce insurance losses. For example:
- Energy-efficient windows are more resistant to breakage by fires, burglars, or windstorms.
- Insulated water pipes reduce the likelihood of freeze damage.
- Ceiling insulation can prevent the formation of destructive ice dams and potentially dangerous icicles on roof eaves.
- Making roofs lighter in color, insulating attics, and improving natural ventilation can reduce the number of deaths caused by severe heat waves.
- Financial losses from frozen pipes and electrical fires could be reduced by more than $2 billion per year.
For More Information
- The Power to Insure: Reducing Insurance Claims With New Electricity Options — Commissioned by DOE and the Northeast Sustainable Energy Association (NESEA), this paper explains how distributed generation benefits the insurance industry. (PDF 168 KB) Download Acrobat Reader.
- Electrofinance — Describes how the insurance industry could become a major player in electricity markets.
- "Going Green Reduces Losses," — Reinsurance Magazine, March 1997. Discusses ways in which energy efficiency can reduce insurance losses.
- Lawrence Berkeley National Laboratory has published numerous papers on the connection between energy and insurance. These papers can be downloaded from LBNL's Insurance Loss Prevention Web site.
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