The role for re/insurance in decarbonising the construction sector

Reducing greenhouse gas emissions and limiting the consequences of climate change is one of the biggest challenges we face as a society currently.

We’ve seen many nations, regional blocs and private sector enterprises pledging to transition to net zero by 2050 as part of the Paris Agreement, in an effort to limit rising temperatures abate the worst impacts of the changing climate.

The construction sector has an enormous role to play. Looking at the European Union alone, buildings account for around 40% of energy consumption and 36% of CO2 emissions. That makes them the single largest energy consumer in the region.

Many construction companies have set themselves sustainability ambitions.

Across the construction value chain, we see three major ways the industry is having to adapt to both mitigate and manage climate change impacts, and therefore the engineering lines of business in insurance.

1. The growth of construction materials from sustainable sources
2. Materials and methods that help reduce a building's operational CO2 emissions – for example installation of photovoltaic panels
3. Materials and methods that provide adequate resilience and protection from the consequences of natural catastrophes and manmade perils.

These changes will not only apply to new buildings, but the existing building stock too. It’s generally accepted that around 85% of the buildings that will be present in 2050 are already built, though with regional variance. In other words, the key to making the sector green hinges on decarbonising the current built environment as well as the future one.

Three sets of stakeholders across the construction value chain will play a pivotal role in ensuring the industry gets where it needs to go: raw material producers, investors and, of course, re/insurers. Working as an industry to tackle these challenges will enable us to reduce the risks associated with the transition to net zero and thus increase resilience.

First, we need to uncover and to understand the risks by finding the right technologies and processes to support the industry's transition. To this end, gaining global perspectives and knowledge sharing are key to understanding the new risk profiles for insurers, while ensuring the right expertise is available in the local market.

So, what types of risks are we seeing from green materials and construction?

One of the most common activities involved in the decarbonisation of the building stock is the retrofitting of ‘green attributes’ to existing structures - the most obvious example being the retrofitting of new components to improve performance in key areas such as insulation and heat retention.

However, green attributes may also change the risk profile of buildings. For example, many façades are being installed which are made from an aluminium composite material with a polyethylene core. While these doubtlessly provide superior insulation, they can pose additional risks due to being highly combustible.

These are all important considerations. For insurers, the key is to manage changing risk profiles by partnering with clients, risk managers, consulting engineers and experts in all fields to understand the evolution of risks, find ways to quantify and mitigate them, and in turn develop relevant solutions.

There are also supply chain risks to be factored into insurance strategies and offerings.

A higher frequency of certain material types by region can change the portfolio risks for insurers in those areas – for example, wood construction in northern Europe is made simpler due to the abundant supply of local raw material. Bottlenecks also pose a risk. For instance, if a building in regions such as Asia or North America burns down, it might take a long time to rebuild because most cross-laminated timber comes from Europe.  

At a broader level, markets such as Asia have more of a focus on new building projects, while others (including Europe) are placing a heavier emphasis on retrofitting existing buildings. Laws around mandatory coverage for contractors and buildings can also vary around the world, something which insurers must grasp and keep up with as the transition to net zero continues.

In addition to clear regional variables, there are some common global risk themes emerging when it comes to using sustainable building materials. Indeed, mass timber is a prime example of a material which presents several risks in one view.

This is significant, not least because it looks set to play an important role in a futureproofed building stock. In January 2019, the International Code Council approved a set of proposals to allow tall wood buildings as part of the 2021 International Building Code, which now allows up to 18 stories of mass timber.

Insurers, therefore, need to gain a detailed understanding of the risks associated with these constructions.

Be it mass timber constructs, retrofitting upgrades or any other integration of green attributes to buildings, these projects contain an element of the ‘new’, and re/insurers must consider how this impacts policies.

Currently, we are observing five key areas of development in how insurers are responding.

1. Many are baking in a commitment to develop a pre-agreed remedial works protocol. This is being formalised ahead of the project start and any losses occurring, thus greatly mitigating the loss and speeding up the reinstatement process.
2. Policy requirements around the storage of components awaiting installation are also being tightened. Special precautions must be taken in relation to safeguarding components awaiting installation. Here, the risk engineer or underwriter may suggest risk mitigation measures. However, specifically considering a condition precedent to liability in this respect is important, particularly in certain types of projects and geographical locations. 
3. Insurers are also creating aggregation clauses that are mindful of the repetitive nature of losses. One potential issue on the wording is around how a policy may react where defective components manufactured offsite have been introduced numerous times to the works, causing multiple events of damage.  
4. Clarity on how CAR, transit, and manufacturing policies begin, and cease is also being sought. Parties need to be clear from the outset on the exact point where the risk is transferred from the manufacturer to the insured, and the wording and premium need to reflect this allocation of risk.  
5. Finally, the insurance sector is investing in keeping up with new technologies and training throughout the value chain. This is vital, as by continually developing understanding of the risks, the industry will remain on the right path and be able to provide robust, relevant and effective risk management support.

With net zero targets being worked towards, the construction sector is becoming increasingly focused on sustainability.

That lens is defined by two strands: buildings not only need to be made from responsible materials and work efficiently to cut operational carbon emissions, but they must also be resilient to natural and manmade disasters.

New technologies and techniques are enabling this. And even though insuring new technologies is especially challenging, Swiss Re has a 160-year track record in reinsuring new frontiers.

Painting a full picture is key. Unintended consequences can arise from focusing on a single attribute of building performance, such as sustainability, without due consideration of other crucial performance metrics such as fire safety.

Meanwhile, minimising environmental footprints and providing positive environmental benefits to local communities should be considered equally alongside resilience to shocks and risks such as fires, floods and storms. It is important to ensure that the two strands of sustainability do not compete against each other. To do that, unsiloed approaches to building regulation development and design, adequate testing and design of new materials and systems, and adequate enforcement mechanisms all need to be carefully managed.

Striking the right balance presents the insurance sector with a significant opportunity to provide proactive support for the truly sustainable construction of a more resilient built environment. Provided re/insurers are understanding of the changing risk profiles of emerging construction methods, they can play a facilitating role and help support various stakeholders as they embark on their net zero journeys.

Using our reach and network, we can connect local stakeholders to knowledge, processes and best practices which are being implemented in other parts of the world. This cross-pollination of expertise will be critical to the global decarbonisation of the construction sector.