This blog was authored by Talley Burley, Manager, Climate Risk & Insurance and Carolyn Kousky, Associate Vice President for Economics and Policy.
This is the third blog in a multi-part series on how insurers can support decarbonization and the energy transition. This series explores opportunities and challenges and highlights emerging insurance innovations that can drive emissions reductions. In this post, we discuss how insurance can support climate-friendly rebuilding after a disaster.
In the United States, buildings account for more than a third of national CO2 emissions and many buildings are not able to withstand the impacts of future climate extremes. As the risks of climate disasters grow, our buildings require updates to decarbonize and improve energy efficiency and better protect inhabitants from intensifying weather-related events. State and local building codes are important tools to shrink emissions and improve resilience for new buildings. But 75% of existing residential buildings will still be standing in 2050, which means these structures will need retrofits in the coming years to improve efficiency and resiliency.
The rebuilding process after a natural disaster can be an opportunity to build back stronger and greener. Insurance can help to drive climate-smart upgrades and support retrofits that lead to savings over time from lower future losses and reduced energy use. Unfortunately, too often post-disaster rebuilding proceeds without these upgrades, replacing the structure and its components exactly as it was before. This is due to a variety of factors: high upfront costs, households lacking information on what changes to make, a shortage of appropriately trained builders or contractors, or concern that changes to the building will slow the recovery process. Insurance can also be a barrier, because of common restrictions that require covered repairs to restore the original structure.
Climate endorsements — offered through homeowners insurance policies — coupled with cross-sector partnerships to support deeper policyholder engagement during reconstruction could address some of these barriers. As discussed in our first blog of the series, endorsements are optional riders that provide policyholders with additional funding for certain activities following a claim during rebuilding. A climate endorsement, for example, could provide additional funding to support the installation of climate-friendly building materials, electrification, energy efficient systems, or certified construction techniques that minimize future damages from extreme weather.
These types of endorsements are not new. The Insurance Institute for Business and Home Safety (IBHS) has developed the FORTIFIED roof certification. A roof built to this standard can withstand high winds, helping to reduce property losses after a hurricane. Beginning in 2020, the Mississippi Windstorm Underwriting Association (MWUA) began offering a FORTIFIED endorsement. For MWUA policies where the claims process finds that 50% or more of a roof needs to be replaced, the endorsement provides extra funding to install a FORTIFIED roof. If climate-smart endorsements, like these, could be offered by all homeowners insurance providers at low cost— accompanied by outreach and education programs—the insurance industry could help to drive significant reductions in building-related emissions and increase climate resilience.
An endorsement that incorporates climate-friendly rebuilding practices could provide multiple benefits:
- Address financial barriers for climate retrofits
Comprehensive climate retrofits – even if they reduce future disaster losses or generate energy savings – may require significant upfront funds that many homeowners lack. While grant programs and incentives exist, including through the Inflation Reduction Act and FEMA’s hazard mitigation grant programs, direct-to household funding to support climate improvements is limited. Additionally, traditional post-disaster funding from the federal government is only available following a presidential disaster declaration and usually does not cover all damages, let alone climate-related upgrades. A climate endorsement could offer additional financial resources during post-disaster rebuilding to support the costs of climate retrofits.
- Reduce uncertainty during lengthy rebuilding processes
Federal disaster assistance from FEMA and HUD can take months and sometimes years to reach households. Often households are uncertain when aid will arrive, what activities will be eligible for reimbursement or funding, and how much aid they will receive. In order to return home quickly, many households undertake work out-of-pocket on critical components, including replacement of damaged systems. Knowing that insurance coverage would provide additional funding for specific climate-smart retrofits could enable households to begin investing in those measures earlier in the rebuilding process and ensure important retrofit opportunities are not lost.
- Reduce the risk of future damages by building back better
Many post-disaster recovery assistance programs focus on replacing damaged property to the same specifications as existed prior to the event. This does nothing to address the climate risk of a property, reduce future damages, or make adjustments for a greener and safer building. The use of endorsements could enable rebuilding better, stronger, and greener because the endorsement would be specifically tied to these types of actions. Additionally, climate retrofits could also have the added benefit of lowering insurance costs and improving insurance affordability.
- Identify and prioritize climate retrofit investments
Installing climate retrofits can be complex, and it can be hard for homeowners to assess which retrofits are worthwhile and how to prioritize the array of retrofit options. This is especially true after a disaster when families may face physical hardships, information barriers and trauma, while navigating complicated insurance and government processes. Climate endorsements can help to simplify decision making by specifying which retrofits would be eligible. And, if coupled with education and outreach climate endorsements can help to provide clarity to homeowners about which measures may be most effective in driving resilience and improving energy efficiency.
While there are many potential benefits to climate endorsements, there are challenges to overcome, too.
- Affordability for Policyholders One question is how to make endorsements affordable for policyholders. Many households cannot or will not pay higher insurance premiums – but insurers cannot provide lots of extra funds at the time of claims if they do not account for those payouts ahead of time. There are many low cost decarbonization and resilience measures that could be covered at no or low cost, however, and could be a starting point for such endorsements.
- Technical Support and Certification Another barrier to address is providing the right technical support to policyholders, connecting them to a trained and trusted workforce to do the climate-friendly rebuilding, and developing systems to certify that climate-smart measures have been used. These actions are essential to provide policyholders with support and to ensure measures are properly installed, but could also come with costs to insurers.
- Integration with Building Codes Finally, endorsements are most likely to be effective in conjunction with updated building codes and a growing workforce trained in climate-friendly construction, both of which take time and broader partnerships.
With support from the CO2 Foundation EDF is currently developing potential solutions to these challenges and identifying ways to implement and scale the adoption of climate endorsements. Please stay-tuned in the spring for more!