Why do building insurers need to start thinking about carbon

As we saw throughout 2023 there was little commitment from the government to introduce measures that address the built environment’s significant contribution to carbon emissions. Indeed, both the Spring Budget and Autumn Statement were noticeable for their omission of mandating on the measuring and reporting of whole life carbon. Currently, it isn’t mandatory for the insurance industry, or indeed any industry, to measure whole life carbon. In the case of the former, this would involve the measuring and reporting of the amount of embodied carbon that would be emitted in the event of repairs to fixtures or an entire new rebuild.

However, as we begin 2024, there are indicators that mandatory carbon reporting could soon be higher on the government’s agenda with its introduction of several measures that are aligned with its strategy to decarbonise all sectors of the UK economy and meet net zero targets by 2050. Here are four areas that the insurance industry could take into account when considering the carbon number.

Going back to our roots

The use of timber in construction has been gaining traction for some time – The Black & White Building in Shoreditch has gained notoriety for being the tallest mass-timber office building in central London. Aside from its evident visual aesthetics, it boasts impressive environmental credentials with its designers claiming its embodied carbon was reduced by 37%, in comparison to a concrete and steel building. In early 2023, plans were unveiled for a sustainable housing development that aims to be ‘the largest timber development in the UK’ – The Phoenix Project in the East Sussex town of Lewes is using the material, – along with steel, bricks and concrete, as one of the main building assets. The project also aims to make use of the county’s dense-woodland to kick-start a sustainable long-term industry there. However, despite its growing popularity, the government has been slow to endorse the material. That was until December last year when the Department for Environment, Food and Rural Affairs (DEFRA) hailed the use of timber in construction in its roadmap to decarbonisation.

The roadmap outlined its use as part of the government’s commitment to ‘grow and maintain a sustainable and long-term supply of domestics timber and wood products in the 2023 Enviornmental Improvement Plan’ that will ‘support progress towards the Net Zero Target’. This makes up part of its Net Zero Strategy that sets out plans for ‘decarbonising whilst growing the economy.’ The roadmap states that the use of timber can reduce the embodied emissions in a single building by 20% to 60%. It also outlines the wide range of uses of timber in construction – from the most established use of structural timber in open or closed panel timber frame systems to wider non-structural uses that include flooring, framing and doors, windows and stairs.

As the use of timber and other sustainable materials continue to feature more prominently on the government’s agenda, it’s clear that structural components, which include more traditional, high-carbon intensive materials, could be phased out. Although it’s unlikely they’ll disappear entirely, this could have an impact on rebuild valuations if the government pushes for more sustainable alternatives, in the event of a rebuild. Insurance companies need to start considering materials for replacements that are less carbon intensive, as well as the potential associated costs of materials with a higher carbon number. Aviva has made some headway on this issue, by widening its underwriting appetite to include engineered timber in commercial developments. We expect to see more companies follow this example.

What risks does your portfolio pose?

In December of last year, the government introduced the pioneering Climate Change Levy – another key measure that’s aligned with their Net Zero Strategy – to tax imported materials that are carbon-intensive, such as iron, steel, aluminum, ceramics and cement from overseas. The government’s decision was instigated by a consultation that revealed 85% of respondents ‘perceive carbon leakage as a present or future risk to their decarbonization efforts – ie, the risk of being undercut by imports that haven’t paid equivalent carbon prices. This new tax is due to come into effect by 2027.

Along with the Net Zero Innovation Portfolio and Industrial Energy Transformation Fund (IETF), it demonstrates the government is taking some responsibility to support the industry’s decarbonisation efforts. It’s time for insurance companies to start assessing their portfolio, in terms of the carbon number associated with it – not least as the more resilient materials that insurers prefer to underwrite tend to be the most carbon-intensive. In the event of a rebuild, they need to evaluate – how much extra will they have to pay for any carbon-intensive materials that need to be replaced and how will that cost be passed back to the consumer? Insurance companies are at risk – in terms of monetary and reputational risk – if they’re not yet considering the potential impacts.

Counting the cost of underinsurance

According to The Financial Ombudsman Service (FOS) building insurance complaints are on the rise. Their figures show there were 6,497, in total, in the last financial year (2022-23) – an increase of over a quarter, compared to the year before where complaints reached 5,101.

One of the most common complaints they received was that ‘the insurer offered customer money but it wasn’t enough to complete the repairs or replace what was damaged’.

Underinsurance can leave customers substantially out of pocket if they ever need to make a claim. For example, if an insured customer makes a claim of £40,000 on a property insured for £400,000 but its current valuation is £500,000, it’s likely that the insurer will proportionally reduce the claim amount to £32,000​.

However, what if the same were to apply for carbon insurance? In the future it’s probable that the carbon number for rebuilding will become as equally important as the associated costs. If, for example, the carbon number associated with an entire rebuild or replacement is given as 500 tonnes in the initial assessment, but the actual associated number is higher at 1000 tonnes, the insurer may only be liable to pay out half the amount.

Although brokers and insurance agents have little control over the final information their clients provide, they do have a duty to ask enough clear and specific questions to correctly represent the sum insured and assess the impact on the consumer. And with 33% of complaints upheld by the FOS last year, it’s also integral to preserving a business’ reputation. In addition to this, it’s important for insurers to get ahead of savvy consumers who have done their research and are prepared to ask questions around the carbon number.

Government has alluded to mandating whole carbon reporting in new building regulations

The government is proposing that all new buildings are net zero ready from 2025, according to a consultation on future building energy standards published recently. The Future Homes and Buildings Standards, will apply to new homes and non-domestic buildings and sets out technical proposals for changes to Part L of the building regulations which would come into force in 2025. These include banning gas boilers in favour of air source heat pumps for domestic and non-domestic buildings.

Although the proposals don’t apply to the upfront embodied carbon emissions generated from making the products and materials used to construct buildings, the government has stated it intends to consult on an approach to measuring and reducing embodied carbon in new buildings in ‘due course.’ Therefore, insurers could be required to provide a carbon number that indicates all the energy used during the construction of a rebuild – from the extraction of raw materials, their transportation, installation and maintenance, and their end-of-life process.

Conclusion

The reporting and measuring of whole life embodied carbon is currently not mandated for insurance companies. However, as more measures are introduced to ensure the government meets their decarbonisation targets by 2050, the cost of materials and the carbon cost associated with them will become equally as important. It’s essential that insurers begin to address the challenges that will arise from this, while balancing the need for using suitable materials that are durable and sustainable, without exceeding their carbon footprint or number.

The construction industry already has the technology to estimate the rebuild costs of materials – it won’t be long until it’s developed the technology to assess the amount of embodied carbon emitted for rebuilds and repairs.