Executive Summary
The contention that global climate change could disrupt the world's weather is not new, but the potential losses it represents have drawn attention from the financial community—particularly property-casualty insurers that face large damage claims when climate change occurs. With the deregulation of the electricity sector, the specter of climate change can be transformed from a potential threat into an exciting opportunity for insurers, bankers, and other financiers who have the need, foresight, and capacity to invest in energy efficiency and renewable energy as mitigation strategies.
The European insurance industry has already publicly conceded that the science predicting global warming is worth worrying about. Unfortunately, with few notable exceptions, U.S. insurers have not followed suit. If American insurers are to become players, it will be for economic reasons at first, and they must be shown clear, immediate benefits that improve their bottom line profits. Electric restructuring has the potential to accomplish just that.
Under electric restructuring, many believe the bundling of services such as electricity with telecommunications services to be innovative. The electrofinance proposal described in this paper goes further: it bundles property-casualty insurance, a retirement fund, and electrical service into a single bill. Any savings from reduced electricity bills due to aggregation and encouraged energy efficiency flows into the retirement fund.
For the sake of illustration, suppose that a homeowner purchases a package of home insurance at $50 per month, a retirement annuity at $50 per month, and levelized electricity service at $50 per month, for a total bill of $150 per month. With access to a competitive electric market, the insurer would purchase power on behalf of the homeowner at a far lower cost than otherwise available. The first savings come immediately from the insurer's ability to aggregate demand and provide buying power, which could bring costs 5% below the current norm.
The second and most lucrative way to achieve savings—and the key to the environmental benefits of the electrofinance concept—is through the encouragement of aggressive energy efficiency and load management. Depending on numerous variables, this might lower electric bills by an additional 1540%. The key for electrofinance purposes would be the subsequent addition of this sum to the base annuity; in the example cited, this along with the aggregated demand savings represents an additional $20 added to the $50 base annuity amount, for a total of $70 per month. Further premium reductions and annuity additions would be possible for clients who choose safer appliances that are preapproved by the insurer as reducing fire and other hazards to property.
How much of a difference might such changes make in a client's annuity? This would obviously depend on a number of factors, but over 20 years the value of the annuity could increase from $20,000 to $30,000.
In addition, clients could elect to purchase a photovoltaic (PV) system under a low-interest, long-term loan that could be partially paid for with the savings from efficiency measures and load management. In the example used here, with an up-front cost of $7,000 and with a 20-year, 5% loan, a 1-kilowatt PV system would add $46.20 a month to an electrofinance customer's payment plan, for a total monthly payment of $196.20 for all services. If the output of the PV system is 1,400 kilowatt-hours (kWh) per year at equivalent value of 8¢/kWh, this would translate into an additional monthly savings on electricity of $9.33 that could be put into the annuity portion of the plan.
The driving force behind this concept will not be environmental concerns but the retirement of 76 million baby boomers in the United States. There are few prospects that they will be able to sustain their current lifestyles with the small amount of savings they have put away. While there are still many uncertainties surrounding the exact effects of global climate change, there is little doubt that this massive retirement group will have profound consequences on American society.
Perhaps the most important aspect of electrofinance is that it brings the American insurance industry into the struggle to contain climate change—not through moral arm-twisting but through the appeal of short-term profit. And electrofinance, combined with accumulating losses from extreme weather events, may open the true prize at stake for clean energy: the massive investment portfolios of the insurance sector.
Although the potential profitability of this market-driven tool appears to be extremely lucrative for insurers, a number of regulatory, business, and perceptual barriers must be surmounted before companies will even consider offering such a product. The very act of bringing such a seemingly radical concept to a high decisionmaking level is the foremost obstacle to overcome if electrofinancing is to succeed.
Abstract |
Message from REPP Staff |
Executive Summary
Begin HTML Version |
Download PDF Version