© Lloyd’s 2021

Low carbonbuildings

Opportunity assessment
MatureThe relative positioning of opportunities forthe insurance industry have been weighted
by:Mature, sizeable existing markets

1. Attractiveness, which considers both
the growth and size of the market,
andCriteria

WeightingGrowth50%

50%

Maturity ofindustry

25%

Maturity of tech25%

‒ Number of existing products andcarriers
Geothermal‒ More innovative products required
to meet emerging risks

Low carbon buildings

GridNascent, emerging opportunities

Batteries‒ Risks currently less known‒ Significant opportunity expected tomaterialise in the longer term
‒ Limited insurance capacity
currently

Nature based solutions
and carbon credits

Insurance
capacity

25%Insurance
product
maturity

25%

ImmatureSize‒ Established insurance products inmarket

Market maturity(industry, technology and insurance)

Marketattractiveness

2. Maturity, which takes into accountboth the wider industry and insurance
marketMarket maturity

Executive summary

Building a larger presence in emerging ‘transition’ technologies could help the insurance industry tolead innovation and grow sustainably

CCUS

Nascent, emerging opportunities‒ Early action could support earlymover advantage and capture
significant future growthHigh growth and market size

Market attractiveness(size and growth)

Classification: Unclassified2

Overview

Buildings account for a large proportion of global energy consumption and GHG emissions, making retrofits
and green property coverage critical components of the net zero transition
Industry and insurance market dynamics

Investment••

Retrofitting aims to reduce the associated environmental impacts throughupgrading the building using modern technologies to retrofit better energy
management and efficiency, improving ventilation, and reducing heat loss
Green property is any plan, project or technique that might lessen or eliminate
negative environmental impacts whilst minimising future impacts e.g. by installing
new heating tech such as Heat pumps and Hydrogen boilers

Key growth drivers

Headwinds

Insurance COBof global energy consumption is through buildings, along with
25% water usage, and 33% greenhouse gas emissions

Legislation

Greenwashing

Futureproofing

Supply chain issues

Insurance offerings

Value chainc.40%

Net zero targets

The role of technology

Developers/investors/
manufacturers
In most markets developers/
investors will be responsible for
insurance

Government organisations

Financial institutions

In certain jurisdictions thegovernment is responsible for
insurance and are key owners of
low efficiency buildings

Owners of large real estate
portfolios will be likely key clients

HoneywellWorcester
Bosch Group

EuropeanInvestment
Bank

Infrastructure
Ontario

J.P.
MorganBlackstone

JohnsonControls

Viessmann

New York
Sate ofOpportunity

CanadaInfrastructure
Bank

Schroders

Brookfield
Asset
Management3
Classification: UnclassifiedOverview

While investment is expected to grow, a lack of consistency in policy is likely to hamper acceleration of retrofits
for commercial properties

Investment

Global investment breakdown
Growth drivers

Retrofits and green buildings (heating1)
investment, 2025 – 2030 ($bn)2

Legislation and incentives – The UK government now requires all >£5m a year government
contracts to commit to net-zero by 2050, whilst from 2027-30, in the EU, it will be mandatory todisclose all potential emissions over the building’s lifecycle. In the US, the Inflation Reduction Actof 2022 included >$5 Billion incentives to drive low carbon procurement in buildings andconstruction+41%

Value chain$322bn$228bnFutureproofing – In a post-pandemic world, there is a renewed drive to shift towards
sustainable practices, whilst minimising shocks to livelihoods and ensuring societal changes areresilient to any future, unexpected economic shocks
Net zero targets – It is estimated that the global construction sector must decarbonise by almost
100% by 2050 to ensure Paris Climate agreements are achieved
Headwinds

Insurance offerings

Insurance COB

Current market trends‒ The Renovation Wave in the European Green Deal aims to renovate 35
million inefficient buildings by 2030, funded by NextGenerationEU andprivate institutions‒ However, it is estimated that €200bn p/a would be needed to meet thecurrent net zero targets, and the current rate of retro-fitting would need to
be tripled‒ Lack of long-term clarity and certainty about the policy and regulatory
strategy for decarbonising buildings and lack of trust due to previous
policy failures is likely to hamper acceleration of retrofits for commercial
properties

Greenwashing – ‘greenwashing’ claims may arise against construction professionals as
developers focus on sustainability and energy performance. Developers may make bold ‘netzero’ claims, with a resultant risk of litigation if those claims aren’t met
Supply chain issues – Post pandemic there have been supply issues with building materials.
The drive to build green may exacerbate these issues with the requirement to only use green
materials, therefore leading to delays on completion dates or the installation of non-green
products
The role of technology – From June 2022, all new residential buildings in England and Walesrequired to have electronic vehicle charging points. As buildings become smarter and moreconnected with technology this increases the potential for technology failure and cyber risks

4Classification: Unclassified

Overview

The buildings and construction value chain is complex, with low-carbon solutions adding further demand for
tailored insurance solutions

Insurance offerings

Building value chain

Stakeholder‒ Manufacturers of building
materials
Technology applications‒ Low carbon materials used
to reduce embodied carbon
in manufacturing ofmaterials e.g. mass timber

Real Estate

Construction

UsesStakeholder‒ Contractors carrying out theconstruction ofbuildings/infrastructure

Stakeholder‒ Real estate owners andinvestors
Technology applications

Stakeholder‒ Occupants of buildings
including residential andcommercial

Technology applications‒ Carbon credits

Technology applications‒ Electrification of equipment
including site vehicles‒ Decarbonisation of assets
and portfolios‒ Smart devices‒ Use of heat pumps‒ Design and processoptimisation for demand
reduction‒ Renovation of buildings:
use, maintenance, repair,replacement, refurbishment‒ Energy and water operation

Stakeholders

Influencer value chain

Insurance COB

Value chain

Investment

Manufacturing

influence

influence

All parties play a major role invery early phases of buildings,and decisions have a big
influence on how much carbon
the buildings will emit in thefuture

Responsible for determining if and how constructedCompanies in the value chain must cooperate and engage to collectively reduce indirect emissions of the building system while meeting their respective reduction goals

5Classification: Unclassified

OverviewAs global policies mature in line with transition pathways, investment in retrofits will follow, presenting a material
opportunity for the insurance industry to support clients

Investment(Re)insurance class ofbusiness impact
Accident andhealthCasualty

Gaps in coverage currently offeredFinancial lines: Professional indemnity to cover against breach of contractual
obligation to exercise reasonable care and skill from contractors, engineers andarchitects involved in design and construction works. Warranties or energy
performance guarantees related to efficiencies gained by the technology could beincreasingly important as regulations tighten. These would typically sit outside
existing policy provisions and would likely need to be covered through an add-on.

‒There is limited capacity currently available for energy performance guarantee –this is a crucial element to provide investors with cover should the investment inretrofits and energy efficient technology not be covered by the actual energy
savings‒

Warranties and performance guarantees require careful consideration to ensure thecover is insurable‒

There is a potential for developers to make bold net-zero claims, with a resultant
risks of litigation if not substantiated. BNY Mellon were charged in 2022 of
misstatements and omissions about ESG considerations in making investment
decisions. Given this is an emerging risk, there are no specific products but could
be included under errors & omissions (E&O) policies in future‒Constructing and improving buildings to be more sustainable does not creatematerially different risks to existing property and liability construction exposures
and would generally fall within markets appetites. However, carriers will need toconsider the impacts of new technologies and/or materials to the exposure. For
example, increasing the likelihood and severity of fire losses through the greateruse of timber and structural insulation panels in new construction projects‒

Prototypical methods of construction and materials being used can materiallyalter the exposure profile, particularly for latent defects (which can take a number ofyears to emerge), and result in unexpected losses which could also be complex andexpensive to settle. These challenges will need to be addressed by insurance
markets to ensure a sustainable insurance offering for low carbon buildings‒

Cyber risk from smart technology in homes generally can be covered undertraditional Home Insurance currently however for businesses as this technology
becomes more prolific there may be a need for separate cover. As the market
matures, the growth in connected devices and distributed energy resources isexpanding the potential cyberattack surface of electricity systems, raising cyberrisks with wide reaching consequences

Value chain

Cyber

Financial lines

Insurance COB

Marine, aviation,transport (MAT)

Casualty: Public and employers’ liability to provide cover against the associatedrisks within buildings projects including personal injury or death

Other (Construction): Anticipated growth in construction/erection all risks(CAR/EAR), decennial liability and delay in start-up (DSU) coverage, as new projects
exit design phases and begin construction in the coming years

MotorProperty

OtherInsurance offerings

Key coverage sought for projects

Other (Cyber): Connected devices and smart technology is likely to be increasingly
utilised in combination with energy efficiency, creating additional cyber risks

ImpactHighMedLow-6Classification: Unclassified

Overview

Change is being driven from both ends of the insurance lifecycle, with a growing number of innovative products
available and commitments to ‘Build Back Better’ through the claims process
Example market offerings

Insurance offerings

Insurance COB

Value chain

Investment

ProviderHalifax

Product description‒

Builders risk insurance programmes provide risk-specific coverage for mass timber project risks‒

Accelerates use of cross-laminated timber across construction projects‒

Energy efficiency insurance designed for those investing in energy-saving measures‒

Covers cost of installed assets, project revenue, and annual gaps in energy savings‒

Resilient Repairs clause encourages the replacement and repair of assets in environmentally friendly way, with additional
cost covered by insurers‒

Property coverages evaluate environmental variables like flood and fire to offer insurance against a specific risk profile of
new sustainable construction supplies & methods‒

LSM provide eco-friendly upgrades that allow customers to replace damaged property with products of equal value, while
covering additional costs associated with upgrades of a higher green standard.

‒This could include replacing a damaged roof and covering the cost of adding solar panels‒Halifax Home Insurance have partnered with Ideavate Limited to make homes greener‒

During the claims process Halifax will then provide options for how they can structure the repair to include options such as
wall insulation and solar panels‒

The Build Back Better scheme enables homeowners to install property flood resilience measures, up to £10k, when
repairing their properties after a flood‒

There are 10 participating insurers signed up to the programme including Hiscox, LV NFU Mutual, Aviva etc

Example industry partnerships
SMI Sustainable Buildings Taskforce‒Made up of global CEOs from throughout the building industry‒Collaborating to accelerate delivery of net zero buildings to reduce carbon emissions

7Classification: Unclassified

Notes & Sources (1)Page numberSource

Notes

3IEA; International Council on Clean Transportation; PwC

1. Another key element to building retrofits and green buildings is use of green materials which isnot included in our model 2. According to the Base Case – Forecast Policy Scenario (UN PRI)

4The Building System Carbon Framework; McKinsey: Climate risk and the opportunity for real estate5McKinsey; IEA; UN PRI

6McKinsey; IEA; UN PRI

7IEA; UN PRI; Carrier websites; SMI ITF 2022 products and services showcase

1. Percentage split according to the Base Case – Forecast Policy Scenario (UN PRI)

8Classification: Unclassified

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9Classification: Unclassified