Prepared for: CAS Enterprise Risk Management for Reinsurers

1
Emerging Risks from Climate Change Potential to
Probable

• Prepared for CAS Enterprise Risk Management for
  Reinsurers
• September 15, 2008
• Presented by Tanya Havlicek
• M.S. Environmental Studies - Land Resources
• Actuarial Assistant

2
Outline

• Background of Environmental Legislation and
  Pollution Liability
• Climate Change Definition and Impacts
• Climate Change and Insurance
• Conclusions
• References and Appendix

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Environmental Liability

• Three major regimes for forcing the responsible
  actors to internalize the costs of accidents to
  third parties
• Tort Activated subsequent to accident, tort
  process determines liable party
• anticipation of future potential liability
  creates powerful influence on current behavior
• Statutory Attempts to constrain behavior prior
  to occurrence of accident
• User charge Market mechanism leaves risk
  management decision in private hands
• All three could be tools in managing climate
  change risks

Source Katzmann, 1987
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Environmental Liability Legislation

• RCRA and CERCLA created toxic pollution liability
  (statutory)
• RCRA Resource Conservation and Recovery Act
  (1976)
• Created Cradle to Grave liability
• exacts stringent bookkeeping and reporting
  requirements on generators, transporters, and
  operators of disposal facilities handling
  hazardous waste
• must track the progress of hazardous substances
  from their generation through their treatment,
  transport, and disposal
• CERCLA Comprehensive Environmental Response,
  Compensation,
  and Liability Act (Superfund) (1980)
• In response to Love Canal disaster
• created to protect people, families, communities
  and others from heavily contaminated
  toxic waste sites that have been abandoned
• 70 of Superfund contamination cleanup activities
  historically have been paid for by potentially
  responsible parties (PRPs) polluters associated
  with site

Source Environmental Protection Agency
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Environmental Liability

• CERCLA and RCRA rely more on market incentives
  than other environmental statutes
• Require handlers of hazardous chemicals to
  establish financial responsibility requirements
• Unless firm can demonstrate self-insurability,
  financial responsibility must be met by insurance
  (U.S. EPA 1982)
• The acts encouraged a market in insurance for
  nonsudden or gradual pollution damage

Source Katzmann, 1987
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Other Environmental Legislation

• CAA Clean Air Act (amended 1990)
• designed to curb three major threats to the
  nation's environment and the health of Americans
  acid rain, urban air pollution, and toxic air
  emissions
• encourages market-based principles and other
  innovative approaches
• performance-based standards
• emission banking and trading
• national permits program
• reduce energy waste, create market for clean
  fuels derived from grain and natural gas
• utilities can obtain emission reductions through
  customer energy conservation
• Allows the public to ask EPA, state, or tribe to
  take action against a polluter, and, in some
  cases, to directly take legal action against a
  source's owner or operator
• Greenhouse Gases (GHGs) have now been declared
  an air pollutant under the CAA by the Supreme
  Court
• Market based principles, emission trading, and
  energy conservation are already or will be key
  components in managing climate change risks

Source Environmental Protection Agency
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Other Potentially Relevant Environmental
Legislation

• NEPA National Environmental Policy Act (1970)
• all federal agencies must prepare detailed
  statements (EIS) assessing the environmental
  impact of and alternatives to major federal
  actions significantly affecting the environment
• ESA Endangered Species Act (1973)
• designed to protect critically imperiled species
  from extinction
• Allows citizens to sue the government to enforce
  the law
• CWA Clean Water Act (1972)
• employs regulatory and nonregulatory tools to
  reduce direct pollutant discharges into
  waterways, finance municipal wastewater treatment
  facilities, and manage polluted runoff

Source Environmental Protection Agency
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What is the IPCC?

• Intergovernmental Panel on Climate Change
• A scientific intergovernmental body set up by the
  World Meteorological Organization (WMO) and the
  United Nations Environment Programme (UNEP)
• Established in 1988 to provide decision-makers
  and others interested in climate change with an
  objective source of information about climate
  change
• The governments the IPCC is open to all member
  countries of WMO and UNEP. Governments
  participate in plenary sessions of the IPCC where
  main decisions about the IPCC work program are
  taken and reports are accepted, adopted and
  approved. They also participate the review of
  IPCC Reports.
• The scientists hundreds of scientists all over
  the world contribute to the work of the IPCC as
  authors, contributors and reviewers.
• The people as a United Nations body, the IPCC
  work aims at the promotion of the United Nations
  human development goals
• Awarded Nobel Peace Prize in 2007 for its work on
  climate change

Source IPCC
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What is Climate Change?
IPCC Fourth Assessment Report, 2007 Warming of
the climate system is unequivocal, as is now
evident from observations of increases in global
average air and ocean temperatures, widespread
melting of snow and ice and rising global average
sea level
Increase in Surface Temperatures
Rising Global Average Sea Level
Melting of Snow and Ice

• Figure SPM.1. Note Please see Appendix for
  detail on IPCC figures

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What has changed about GHG emissions?

• Global GHG emissions due to human activities have
  grown since pre-industrial times, with an
  increase of 70 between 1970 and 2004
• GHG concentrations have increased markedly from
  human activities since 1750 and now far exceed
  pre-industrial values determined from ice cores
  spanning many thousands of years
• GHG emissions are increasing, and at a rate
  unprecedented in recent geologic time

Figure SPM.3. Global anthropogenic GHG emissions
Source IPCC Fourth Assessment Report, 2007
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What is the Human Contribution to GHGs and
Warming?

• Most of the observed increase in global average
  temperatures since the mid-20th century is very
  likely due to the observed increase in
  anthropogenic GHG concentrations.
• It is likely that there has been significant
  anthropogenic warming over the past 50 years
  averaged over each continent (except Antarctica)

Source IPCC Fourth Assessment Report, 2007
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What are projected GHG emissions?
There is high agreement and much evidence that
with current climate change mitigation
policiesglobal GHG emissions will continue to
grow over the next few decades. Continued GHG
emissions at or above current rates wouldcause
many changes in the global climate system during
the 21st century that would very likely be larger
than those observed during the 20th century
Source IPCC 4th Assessment (2007) Figure SPM.5.
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Impacts of Climate Change
IPCC Fourth Assessment Report, 2007 Figure SPM.7.
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Impacts of Climate Change
IPCC Fourth Assessment Report, 2007
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What could climate change mean for insurance?

• Altered frequencies and intensities of extreme
  weather, together with sea level rise, are
  expected to have mostly adverse effects on
  natural and human systems - IPCC 4th Assessment
  Report, 2007
• weather related hazards are already increasing
  in some regions of the world due to climate
  change, and, as a result, financial losses are
  also increasing The increases in extreme weather
  have placed our current system for
  risk-management, such as insurance, under stress
  Robert Muir Wood, Chief Research Officer, Risk
  Management Solutions

Source IPCC 4th Assessment (2007), Business
Insurance April 9, 2007
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What could climate change mean for insurance?
Source IPCC Fourth Assessment Report, 2007
17
What could climate change mean for insurance?
Source IPCC Fourth Assessment Report, 2007
18
Could Climate Change be the next asbestos?

• Early asbestos litigation set precedent to trump
  workers compensation coverage, creating civil
  lawsuits where company would normally be
  protected by WC as exclusive remedy upheld by
  Supreme Court in 1981
• The U.S. Supreme Court ruled that greenhouse
  gases are air pollutants under the Clean Air Act
  (CAA) on April 2, 2007
• In an insurance context for environmental
  liability, there are still barriers
• Plaintiffs still have to prove that a companys
  specific activities caused a particular event and
  link that event to a specific bodily injury or
  economic loss that could be compensable under an
  insurance policy
• In order to determine negligence or nuisance, it
  must be clear what standard to hold the behavior
  of the corporate defendants to
• Plaintiff must establish when lawful conduct of
  defendants crossed line from reasonable and legal
  conduct to unreasonable and tortious
• Companies covered under current pollution
  exclusions?
• Disproportionate emitters?

Sources Business Insurance April 9, 2007
Business Insurance Feb 5, 2007 www.aar.com.au
IPCC 2007
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Could Climate Change be the next asbestos?

• Brokers have compared potential global warming
  liability claims to the emergence of asbestos and
  toxic tort pollution losses in the past
• Insurers could face substantial liability
  exposures under occurrence-based GCL policies
  sold over the past decades
• Pollution exclusions in some GCL policies may not
  apply to gases linked to global warming
• If you are a risk manager and you are concerned
  about global warming, load up on occurrence based
  general liability policies today because you are
  buying subsidized insurance that has no rate
  component for that risk Dave Dybdahl,
  President, American Risk Management Resources
  Network, LLC, an environmental wholesale
  brokerage
• Insurance companies may have a hard time avoiding
  having to defend some GHG liability cases

Source Business Insurance Feb 5, 2007
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Could Climate Change be the next asbestos?

• Comer et al. vs. Murphy Oil USA et al.
• Class action brought in late 2005 by Mississippi
  homeowners targeting oil, chemical, and utility
  companies over their emissions
• Claimed global warming played a role in causing
  Hurricane Katrina which damaged homeowners
  property
• Suit remained alive for over one year
• Action dismissed for lack of standing and as a
  nonjusticiable political question, appeal pending
  in Fifth Circuit
• The standard to which companies should be held
  concerning GHG emissions was a political
  question, properly left for those elected
  institutions to decide.
• If GHG emissions and climate change are to create
  environmental liability, there would likely need
  to be new environmental legislation or amendments
  to existing environmental legislation to define
  those standards

Sources Business Insurance Feb 5, 2007
www.aar.com.au www.jonesday.com
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Impacts of climate change for PC

• Based on IPCC Report
• Changes in frequency and severity of weather
  events will change frequency and severity of
  insured events and cause increased losses in most
  regions
• Storm damage
• Wildfire damage
• Crop damage
• Transportation disruption
• Sea level change will change coastal exposures
  and eliminate property
• Potential changes in building materials supplies
  as forest and ecosystem services are diminished
  (completion guarantee, alternate materials)
• Challenges in predictability of insured events
  due to changing hazard in existing insurance
  products
• Some impacts could be abrupt and irreversible

Source IPCC Fourth Assessment Report, 2007
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Impacts of climate change for PC

• Directors and Officers Liability
• Insurers providing DO policies may face claims
  against their customers from shareholders
• Shareholders seeking emission reductions and
  greater disclosure from companies on their
  strategies to address climate-related business
  trends

Sources Mills, 2007 Ceres, 2008 Ross et al.,
2007
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Impacts of climate change for PC

• New Product Emergence
• Green-Buildings Insurance
• risk-management benefits associated with green
  buildings
• unique exposures with renewable energy equipment
• Renewable Energy Project Insurance
• products to manage performance risk for renewable
  energy systems
• Pay-as-you-drive insurance
• encourages reduced driving to achieve safety and
  environmental benefits
• Carbon trading
• carbon risk-management strategies for
  participating in emissions trading markets

Sources Mills, 2007
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Impacts of climate change for Risk Management

• New Climate Risk Management Services
• Assessments and economic studies of physical,
  competitive, compliance, litigation, and
  strategic risks
• DO liability studies regarding science, legal,
  and disclosure standards
• Insurance arrangements related to renewable
  energy risks
• Consulting relating to greenhouse gas emissions
  trading
• Assistance to pension funds and their boards
  regarding responsible investing
• Assistance regarding increased climate risk
  disclosure and shareholder activism

Source Mills, 2007
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Conclusions

• There are similarities and differences between
  potential risks and opportunities associated with
  climate change and those of asbestos and toxic
  pollution environmental liability
• It may be difficult for firms to completely avoid
  GHG liability suits, but it could also be
  difficult for plaintiffs to establish legal
  support for successful judgment
• There will likely need to be new or amended
  environmental legislation creating standards for
  GHG emissions liability to emerge
• Risk exposure from climate change is in multiple
  areas, not just environmental liability suits
• The most likely ways in which climate change will
  impact insurance in the near-term are via
  changing hazard in existing products and the
  creation of new green products
• The insurance industry has a history of helping
  society understand and adapt to emerging risks
  climate change is no exception

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References

• Allens Arthur Robinson Law Firm www.aar.com.au
• Business Insurance Feb 5, 2007 April 9, 2007
• Ceres https//www.ceres.org
• Intergovernmental Panel on Climate Change (IPCC).
  2007. Fourth Assessment Report.
• Jones Day Law Firm www.jonesday.com
• Katzmann, M.T. 1987. Environmental Risk
  Management Through Insurance. Cato Journal. Vol
  6, No. 3.
• Mills, E.M. 2007. From Risk to Opportunity
  2007 Insurer Responses to Climate Change. Ceres
• Ross, et al. 2007. Review of Liability Insurance
  Considerations in the Context of Global Climate
  Change. http//insurance.lbl.gov
• U.S. Environmental Protection Agency (EPA).
  Federal Financial Requirements for Owners and
  Operators A Summary. SW-962, 1982.
• U.S. Environmental Protection Agency (EPA)
  www.epa.gov

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Appendix to Figures

• Figure SPM.1. Observed changes in (a) global
  average surface temperature (b) global average
  sea level from tide gauge (blue) and satellite
  (red) data and (c) Northern Hemisphere snow cover
  for March-April. All differences are relative to
  corresponding averages for the period 1961- 1990.
  Smoothed curves represent decadal averaged values
  while circles show yearly values. The shaded
  areas are the uncertainty intervals estimated
  from a comprehensive analysis of known
  uncertainties (a and b) and from the time series
  (c). Figure 1.1