The Top 7+ Climate Change Insurance Topics for the New Year

The Top 7+ Climate Change Insurance Topics for the New Year

December 31, 2009 02:38
by J. Wylie Donald

Crystal balls are preferred by some over tea leaves; others resort to reading entrails. We all seek some assistance as we peer into the future at the cusp of a new year and a new decade. I am no exception, my divining rod: an imprecise dialog with peers and the ever-probing investigation of Google. So here goes a look at coverage in a world of climate change in 2010.

1. The lead story in this area will have to be a decision in Steadfast Insurance Company v The AES Company. In July 2007 Steadfast brought suit against its insured to ascertain coverage obligations in the climate change lawsuit, Native Village of Kivalina v ExxonMobil Corp. Steadfast moved for summary judgment last March; the motion is fully briefed. A decision should be forthcoming. Regardless of how it comes out (unless there is no decision), the ruling will be significant, if only because it will be the first climate change coverage decision.

2. Will the beach pools continue to avoid disaster? Since Katrina in 2005, United States hurricane seasons have been relatively tame. After predicting an above average season last year, meteorologists had to backtrack and acknowledge a below average season. At some point, the averages will catch up and a Category 5 storm will make landfall here. When that happens we will learn whether the post-loss funding mechanisms will fly, or whether a different legislative fix (even a federal fix) will take over.

3a. New products are the name of the game. Insurance is no different. The Property and Casualty carriers have been rolling out green building coverages focused on certification, re-building upgrades, and recycling. Carbon sequestration projects have found cover. Policies covering carbon credits are less apparent. Expect more innovation, but also expect some re-tooling as the carriers respond to more and better information about what they are insuring, and what insureds want.

3b. Don't take my word on this. Dr. Evan Mills of the Environmental Energy Technologies Division of the Department of Energy has annually and comprehensively assessed insurer responses to climate change. Let's hope there continues to be funding for his important work.

4. The National Association of Insurance Commissioners last March established requirements for insurers to disclose climate change risk. The first disclosures are due on May 1. If past history is any metric, the quality of the disclosures will be all over the map. One can be sure the SEC and state regulators will be paying close attention. The SEC has received numerous petitions seeking the same types of requirements for other industries. State regulators are concerned that climate change threatens the viability of insurers.

5. The Carbon Disclosure Project is on an asymptotic roll. It started slowly in 2003 but since 2006 the CDP has grown at an ever-increasing clip (2204 in 2008, up from 1449 in 2007, which is from 922 in 2006). And it has real heft behind it: "on behalf of 475 institutional investors, holding $55 trillion in assets under management and some 60 purchasing organizations such as Cadbury, PepsiCo and Walmart." The CDP reports annually on corporate climate change statements; its cutoff date for the 2009 report was February 1. Companies wishing to join the ever-increasing number of disclosing entities in 2010 will have to move smartly. (For those pondering the link to insurance, the NAIC rule accepts CDP disclosure.)

6. The climate change risk management dialog will become more sophisticated. Climate change will be a disaster for some; for others it will be a golden annuity. Assessing those risks and opportunities will be key to commercial success. As an example, the cement industry is one of the major identified sources of carbon emissions. Yet if adaptation proceeds, cement is going to be a primary element in the "armoring" of the coast. But does one build in a developing country and export the cement with accompanying political risk and transportation cost, or does one make cement where it will be used. Figuring out the successful business plan will not be simple and risk managers and their consultants will have a lot to keep track of.

7. The absolute carbon dioxide exclusion will remain only theoretical. Insurers will continue to rely on their pollution exclusions to stave off any coverage liability for carbon dioxide claims. Don't expect a different approach until the pollution exclusion gets nicked.

If you've gotten this far, you deserve a holiday (I find this stuff interesting, but many do not). So take tomorrow off. Contemplate the future and then grab it. It is the only one we have.

Best wishes for 2010.


Climate Change | Insurance

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