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Global warming: Now an insurance industry concern Companies and groups join effort to effect change By Phil Zinkewicz In 2004, Nancy Skinner, then U.S. director of The Climate Group, an organization that lobbies for business and government action to address global warming, wanted to find out how the insurance industry was addressing this issue. To her surprise, she discovered that most of the insurance companies and brokers she contacted didn’t have global warming high on their priority lists. “I felt the insurance industry would be a natural combatant in the war on global warming,” says Skinner. “It seem[s] to me that the issue of climate change should be extremely important to insurers. In addition, the insurance industry is in a prime position to take up the issue of climate change,” she says. “The insurance industry’s clout is sizable, given that it is the second largest industry in the world in terms of assets, and it has a direct link to most homeowners and businesses. “The industry insures coal-fired power plants as well as wind farms, so it can influence the power industry’s structure,” Skinner continues. “With its financial strength, the industry could help advance the use of new financial instruments designed to allow companies to trade greenhouse-gas emissions in the same way that commodities are bought and sold. The insurance industry has the ability to change behavior and policies and to communicate with clients.” At first, Skinner says, her observations were not well received by insurers. “Their argument was, if global warming is such an important issue to the insurance industry, why isn’t the National Association of Insurance Commissioners doing something about it?” So she went to NAIC meetings and spoke with the association’s leadership. “In March 2006, the NAIC thought the issue was important enough to form a special task force on global warming,” Skinner says. “Today, many insurers and insurance industry representatives have made serious efforts to deal with climate changes in the environment.” So in less than four years, the insurance industry has moved from apathy on the issue to intense interest. And it’s not just the primary insurance industry; reinsurers also have jumped onto the bandwagon. In May of this year, Franklin W. Nutter, president of the Reinsurance Association of America (RAA), testified before Congress that “understanding global climate change and integrating that information into the insurance system is an essential part of addressing climate extremes and conveying information to governments and the public about the economic consequences of human activity in the face of changing a global climate.” Speaking before the U.S. House of Representatives Subcommittee on Energy and Environment and Global Warming, Nutter referred to a sobering GAO (Government Accountability Office) study that reported private and federal insurers paid $320 billion in claims on weather-related losses from 1980 to 2005, with private insurers paying $243 billion, or 76% of the total. Nutter said that property and casualty insurers must be more than a pass-through mechanism for the costs associated with natural disasters. Nutter spoke in support of H.R. 906 (The Global Climate Change Research Data and Management Act of 2007), saying: “The dramatic increase in the incidence of extreme weather events—three of the ten most intense storms ever recorded in North America occurred in 2005—underscores the urgent need for input in government climate research by user communities in order to greatly enhance adaptation and response to the effects of global climate change.” Swiss Re cites risks In a recent article in the London-based Global Reinsurance magazine, Christopher Walker, managing director of Greenhouse Gas and Environmental Solutions, and Mark Way, a member of Group Sustainability Management, Swiss Re, discuss in great detail global warming and its potential effects on the insurance industry. The authors write: “Climate change is probably one of the most important issues facing the insurance industry today. Swiss Re has identified climate change as an important element of our long-term risk management strategy. It has implications across all of our business groups as a risk and an opportunity. Few other factors affect more the bottom line of our clients, insurance companies, than natural catastrophes. We believe that climate change has the potential to affect the number and severity of these natural catastrophes and result in a very significant impact on insurance business.” The authors go on to say that climate change also affects the insurance business in other ways. “There is the potential for it to create uncertainty for mortality rates affecting the life and health reinsurance business,” they say. “On the investment side, it can create uncertainty with regards to the future performance of investments, while it can create new liabilities for our corporate insurance clients.” Swiss Re has already identified potential climate change risk to various areas of the reinsurance business, according to the authors. “Last year, we were the first in the industry to identify and act upon the potential climate change-related risks in directors and officers (D&O) insurance. In accordance with Swiss Re’s best underwriting practice, we actively watch out for potential future exposures that may have an adverse effect on the risk profile of our company and clients. While the company does not at present plan any restrictions, we are making clients aware that directors and senior managers may, in the future, be held responsible if their companies fail to manage their carbon liabilities effectively or to comply with emissions regulations.” Finally, the authors point out that Swiss Re embarked on a 10-year pro-gram in 2003 whereby all its properties will become greenhouse neutral. During an interview with Walker, one of the authors of the Global Reinsurance article, he outlined for Rough Notes some of the other things Swiss Re is doing in the area of climate change. Said Walker: “In 2001, we created Greenhouse Gas Risk Solutions. This unit works to determine where, when and how Swiss Re can play a role in facilitating emissions reductions. For example, my unit focuses on several relevant activities: • Providing clearing and pooling insurance geared to removing the counter-party and delivery risks that have hampered much of early state emissions trading potential. • Raising the credit rating of renewable/alternate energy projects through the insuring of construction, technical and operational risks in projects. • Assisting greenhouse gas emission reductions with investment asset management. For example, we are developing a project financing mechanism for energy-efficient projects in Eastern Europe. • In conjunction with the Commonwealth Bank of Australia, we are developing a project for voluntary emission reductions activities for U.S. and European corporations.” Walker concludes: “These are just a few of the efforts that Swiss Re is making.” Marsh, Travelers sign on In the United States, Marsh & McLennan, the world’s largest insurance broker, has joined the effort. Last year, Marsh briefed its corporate clients, which include roughly 75% of the Fortune 500, on the potential impact of global warming. Marsh’s clients heard from, among others, Carol Browner, who headed the Environmental Protection Agency when then-President Bill Clinton signed the Kyoto Protocol to curb greenhouse gas emissions, and Robert Watson, the chief climate scientist at the World Bank and former head of the Intergovernmental Panel on Climate Change (IPCC). “Between the insurance commis-sioners and Marsh, the message is that companies must take climate change much more seriously,” according to Andrew Logan, director of the insurance program at Ceres, a national coalition of environmental and other public interest groups and investment funds representing $3 trillion in assets. “The insurance industry is well positioned to be part of the solution to climate change, and these actions will force industry executives and corporate directors to address the issue.” Also eager to be part of the climate change solution is The Travelers Companies. Last year the insurer announced its participation in the EPA’s “Climate Leaders” program as part of its commitment to focus on improving the environment of the communities in which it does business. Climate Leaders is a government partnership that works with companies to develop long-term comprehensive climate change strategies and reduce greenhouse gas emissions. “Protecting the environment and conserving natural resources are important principles at The Travelers,” says Andy Bessette, executive vice president and chief administrative officer. In addition to joining Climate Leaders, the EPA has recognized The Travelers’ two largest campuses in Saint Paul, Minnesota, and Hartford, Connecticut, with the “Energy Star” label for demonstrating superior energy performance. The Energy Star label for buildings distinguishes these two campuses as ranking among the top 25% nationwide in energy performance. Moreover, The Travelers’ efforts to reduce greenhouse gas emissions include: • Active involvement in the Business Roundtable Climate Resolve Project, focused on managing greenhouse gas emissions. • Incentives for policyholders to buy hybrid vehicles by offering a 10% discount on auto insurance. • Building “green practice” criteria into corporate vendor and partner relationships. AIG goes green Add AIG to the list of insurers that have joined in the effort to address global warming. In its position paper on the environment, AIG said it “recognizes the scientific consensus that global climate changes is a reality, that it is likely in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth’s atmosphere and that it poses risks to mankind.” AIG says it has established an Office of Environment and Climate Change, one purpose of which is to develop new climate change-related products and services within its investments, insurance and communications operations. “The Office plays a key role in helping AIG reduce its own greenhouse gas emissions while supporting ways for our customers to respond to the global efforts to reduce environmental impacts,” the paper says. Here are some of the initiatives AIG has taken in the war on global warming: • Investments—As part of its sustainability initiatives, AIG is allocating additional private equity investments to carbon finance projects, technologies or assets that contribute to greenhouse gas emissions mitigation. • Financial Products—The emergence of the carbon market offers the AIG companies the opportunity to create new financial products to support the market and participate in it as it expands. AIG Financial Products is continuing to assess opportunities as it develops a business plan for its participation in the carbon market and recently provided credit for a large transaction involving a forward purchase of more than 11 million carbon credits recognized under the Kyoto Protocol. • Insurance: Product Develop-ment—AIG Risk Finance is developing a product to protect against certain exposures relating to the delivery of carbon credits recognized under the Kyoto Protocol. The product under development is being designed to address financial losses that might result if the credits were either not generated or not delivered as a result of operations, credit or political risk. • Consulting—Through its subsidiary Solomon Associates, LLC, AIG identifies and supports energy efficiency improvements in the refining, petrochemical and power sectors through performance benchmarking, best practice reviews, active plan development and project implementation support. Other insurers also recognize the need to pay attention to climate change. Fireman’s Fund is cutting premiums for “green” buildings that save energy and emit fewer greenhouse gases. When the company pays claims, it will direct customers to environmentally friendly products to replace roofs, windows and water heaters. The pay-as-you-drive auto insurance concept has been adopted by General Motors’ GMAC insurance unit, whereby an OnStar global positioning system that accurately measures miles driven allows drivers who use their cars less and produce fewer greenhouse gases to pay lower rates. New Jersey’s Skylands Insurance Companies is offering a 10% discount to auto insureds who regularly use mass transit to get to work. It’s clear that the insurance industry has become concerned about global warming, and that companies are taking meaningful steps to deal with what they acknowledge is a very serious challenge. * |
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