On the Front Lines
As the United Nation’s Paris Climate Conference results are debated, some in the insurance industry have taken leadership roles in advocating for change while working with clients to address the problem.
At least nine insurers have been cited by Ceres – a nonprofit organization founded by investors, companies, and environmental public interest groups after the Exxon Valdez oil spill – for providing leadership in the battle to manage climate change.
Insurers and reinsurers, after all, are on the front lines of providing financial recovery after hurricanes, floods, wildfires, tornadoes and winter storms, which many in the scientific community believe are increasing due to high levels of carbon dioxide in the atmosphere.
“As we learn more and more things about the fragile environment we live in, we have an obligation to take action.” — Joseph L. Boren, chairman of the environmental product line, Ironshore Holdings (U.S.) Inc.
“As we learn more and more things about the fragile environment we live in, we have an obligation to take action,” said Joseph L. Boren, chairman of the environmental product line at Ironshore Holdings (U.S.) Inc.
Insurers at the forefront of action are developing risk models as a way to stay ahead of change – as well as reducing their own organization’s carbon footprint. They are involved in discussions about climate change initiatives, and they are working on ways to promote or favor clean energy use among clients.
Need to Adapt
Until now, the industry has largely seen climate change through the prism of extreme weather events, said Frank Nutter, president of the Reinsurance Association of America (RAA).
“When [insurers] think about what they should do about climate change or extreme weather events, they will focus on ways to reduce those losses,” he said, through advocating for building code changes or adjusting their insurance capacity in risk-prone regions.
“Adaptation is the name of the game.”
But more and more, insurers and industry groups are choosing to take on an advocacy stance, he said.
The RAA works closely with a number of environmental groups such as the National Wildlife Federation and the Nature Conservancy on ways it can support local communities to preserve natural habitats as a way to reduce losses.
“Natural habitats tend to impact the potential consequences of storm surge or extreme weather — the Mississippi Delta around New Orleans would be a good example of that,” he said.
While Swiss Re does not engage lobbyists to work on the issue, it does regularly converse with individuals “at various levels of government, up and down the chain within the industry and outside the industry” on climate change issues, said Mark Way, senior vice president and head of sustainable development in the Americas.
Follow the Water
Louis Gritzo, vice president of research for FM Global, said companies must “follow the water” to understand the risks.
In addition to polar and glacial ice melting causing sea levels to rise – which has been more significant in the Gulf and the Southeast – there’s also been an increase in the intensity (but not the frequency) of rainstorms in North America overall, he said.
Half the U.S. is within one county of the coastline or the Great Lakes, yet development and infrastructure continues to increase in such exposed areas, he said.
“One thing that Superstorm Sandy proved was that multiple ways of preventing flood damage were needed,” Gritzo said.
Sandy caused an unprecedented 14-foot storm surge, eclipsing the 10-foot record set in 1960, and resulted in more than $68 billion in total losses (over $29 billion in insured losses) and 210 deaths.
Billion Dollar Risks
Climate concerns can be split into three categories: higher sea levels, warmer climates and extreme heat, according to The Risky Business Project, a nonpartisan nonprofit founded to understand and communicate the impact of climate change on U.S. business.
In the next 15 years, U.S. coastal areas may see up to $35 billion in damage each year because of higher sea levels and storm surges from hurricanes and other storms, according to the group’s report done in conjunction with the economic research firm Rhodium Group, which specializes in analyzing disruptive global trends; Risk Management Solutions (RMS); and leading climate scientists.
In 2050, “between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide, with $238 billion to $507 billion worth of property below sea level by 2100,” the report predicted.
The sea level rises will be higher on average along the Southeast and Atlantic coasts.
As for warmer climates, it could lead to a loss of 10 percent in crop yields for corn, wheat, soy and cotton in the Midwest and South during the next five to 25 years if farmers can’t adapt.
At the same time, farmers further north and in the Great Plains may see an increase in productivity for these crops but these shifts will have an adverse impact on individual farming communities most vulnerable to projected climatic changes, it said.
“We try very hard to pay close attention to how our business operates in economic and also in social responsibility [terms].” –Jay Bruns, vice president for public policy and corporate responsibility, The Hartford
Extreme heat, the third focus, especially in the Southwest, Southeast, and Upper Midwest, will threaten labor productivity, human health and energy systems, according to the Risky Business Project.
By the middle of this century, the number of days with temperatures over 95 degrees Fahrenheit will double or triple the 30-year average. That will increase demand on regional power generation, as air conditioning becomes a necessity for larger parts of the country. It also may threaten the health and productivity of outdoor workers.
“The project has not called for specific action related to climate,” Nutter said, “but they have recognized that our government often struggles to deal with this issue and private industry [is] often doing a lot to protect their own property, to look at their own footprint.
“They just recognize that this is an issue that … the business community could be and, in some cases, is already dealing with proactively. They put a lot of resources behind the need to do more.”
Changing a Risky Future
Swiss Re got involved with climate change risk assessment and advocacy some 25 years ago, said Way.
Since then, the company has been examining the impact made by its own company as well as the risks of society as a whole.
“We’ve been looking at what kind of products would be most appropriate to either deal with the severe weather impacts or the transition from a high- to a low-carbon economy, so you have things like insurance for renewable energy and clean technologies,” he said.
The company also has regular discussions with clients and shares examples of what can be done about climate change.
It actively encourages corporations to participate in carbon-reduction/carbon-neutral programs, and it, along with three dozen or so companies, including Ikea, Walmart, Starbucks and P&G, have committed to reaching a goal of 100 percent renewable energy for their power requirements.
The Hartford also tries to lead on the issue through advocacy and customer programs.
“We try very hard to pay close attention to how our business operates in economic and also in social responsibility [terms],” said Jay Bruns, The Hartford’s vice president for public policy and corporate responsibility.
To help clients become more sustainable, The Hartford offers a wide variety of credits, discounts and additional coverages for hybrid and electric vehicles, energy-efficient building materials and equipment, renewable energy equipment, and other green-friendly initiatives.
Like Swiss Re and others, The Hartford sees its own efforts to reduce carbon use as important in taking a leadership role, as well as making its own business more sustainable.
The company set an initial goal of reducing its operation’s greenhouse gases by 15 percent from 2007 to 2017, but met that goal in just three years and subsequently met two more reduction goals. As of 2014, The Hartford managed to reduce its emissions by 50 percent.
Swiss Re launched a Greenhouse Neutral Program in 2003 to commit “to going carbon neutral, which we’ve actually been since 2007,” Way said.
“We also have a program called COYOU2 which [provides a] financial subsidy to our staff if they want to invest in low carbon technology, such as an electric or hybrid car, solar heating, installing [high efficiency] windows,” and other items.
Reducing the Carbon Footprint
FM Global cites its engineer-driven underwriting and risk management solutions and property loss prevention research as a way to help clients address their carbon footprint.
“We were the first ones to have loss prevention guidance for green roofs and we have [had those] for solar panels and wind turbines for a long time,” said Gritzo.
“If you want a green building to be really green, it has to last. It has to not just be sustainable in terms of the energy use but it has to be able to withstand typical fire and emissions hazards and natural hazards in the area.
“An enterprise risk management strategy should have a response plan for every hazard for which [the company is] subjected, as well as supply chain analysis, and [a plan for] working with local authorities so people managing facilities in certain locations can understand what local authorities can and can’t do.
“When a catastrophe hits, it’s not the time to be swapping business cards,” said Gritzo.
“You need to have relationships with local authorities before [the catastrophe], whether it is a flood or a windstorm.”
Ceres recommends several steps for insurers and their clients:
• Implement climate risk oversight at the board and C-suite levels;
• Integrate climate risk into ERM frameworks;
• Deepen understanding of climate change scenarios and impacts;
• Engage with key stakeholders (including policyholders) on climate risk;
• Participate in joint industry initiatives on climate risk;
• Integrate climate change considerations into catastrophe models; and
• Consider correlated climate risks in investments.
Boren remains optimistic that the U.S. and international community will join with global insurers and the business community to effectively combat climate change.
He recalled that while he studied environmental science in Los Angeles in 1969, he didn’t see the sky for about 10 days because of the heavy smog hanging over the valley.
“Then, one day, when I walked out of my apartment, I could see the mountains and finally understood why people said California was so beautiful,” said Boren.
It took a while, but eventually sustainable changes such as requiring catalytic converters on gasoline vehicles helped turned the area back into a sunny paradise.
Responding to climate change will be similar, requiring slow but steady changes on the part of the insurance industry and its corporate customers
Coral Reefs Endangered
A “global coral bleaching event” is underway, according to ocean scientists. It is only the third one in recorded history.
Coral reefs — fragile but complex underwater ecosystems that often are called “the rainforest of the sea” – help dissipate wave energy by as much as 90 percent during storms, making them an important barrier to coastal flooding.
“When coral is stressed by changes in conditions such as temperature, light or nutrients, they expel the symbiotic algae living in their tissues, causing them to turn completely white,” according to the National Oceanic and Atmospheric Administration (NOAA).
If the algae loss is prolonged, the coral eventually dies, it said.
“Coral reefs are like canaries in a coal mine.” — Chip Cunliffe, external programs manager, XL Catlin
In addition to helping protect communities from flooding, coral reefs also help support approximately 25 percent of all marine species and affect the livelihoods of 500 million people and income worth more than $30 billion generated by industries such as fishing and tourism.
Coral is also used in the pharmaceutical industry to make drugs that treat some heart disease and cancers.
“Coral reefs are like canaries in a coal mine,” said Chip Cunliffe, XL Catlin’s external programs manager. “Oceans are changing, fairly rapidly, so we think. We as a business are intent on trying to understand the impact of these changes.”
One sobering reason to be concerned about the loss of coral reefs, Cunliffe said, is that property damage from wave action in Bermuda would increase from $500 million to $2 billion over 10 years if its coral reefs were lost.
“And that’s just Bermuda,” he said. “Look at Florida or Australia … places that have big financial centers or population. You’re looking at major losses.”
The world’s coral reefs are in a dramatic state of decline — more than 40 percent of the world’s coral has been lost over the last 30 years due to pollution, destructive fishing and climate change. What’s worse, scientists said, is the decline is expected to continue.
“What really has us concerned is this [coral-bleaching] event has been going on for over a year and is likely to last another year,” said Dr. Mark Eakin, NOAA coral reef watch coordinator.
“We know changes are occurring,” said Mike Maran, chief scientist at XL Catlin, which was a member of the scientific consortium that confirmed the coral bleaching event. “What we don’t know is the speed at which they are changing. We need to have forward insight. This contributes to that data.”
XL Catlin launched a Seaview Survey mission in 2012 to scientifically record the world’s coral reefs and reveal them in high-resolution, 360-degree panoramic images.
The world’s coral reefs are in a dramatic state of decline — more than 40 percent of the world’s coral has been lost over the last 30 years due to pollution, destructive fishing and climate change.
A 30-member team has spent the last three years surveying 32 reefs in 26 countries, including the entire length of the Great Barrier Reef, the remote Coral Sea, the Caribbean islands and Bermuda, and the waters of Southeast Asia. More than 1 million high-definition images have been recorded.
NOAA has been working with the XL Catlin Seaview Survey team to gather the data needed to better understand the extent of this bleaching event and how to effectively address it, Eakin said.
Cunliffe said it is appropriate XL Catlin is taking such a prominent role in the research, considering the whole concept of insurance was developed in the 17th century by Lloyd’s of London to protect against losses in the shipping industry.
“This is a link back to that,” he said. “We need more data to understand the complex risks that we are underwriting.
“What really has us concerned is this [coral-bleaching] event has been going on for over a year and is likely to last another year.” — Dr. Mark Eakin, coral reef watch coordinator, NOAA
“We know more about the moon than we do our own oceans,” Cunliffe said. “We’ve only mapped 1.5 percent of the sea floor. We know very little other than change is happening quickly.
“It’s necessary for us as a business to fill that data gap.”
By monitoring the reefs over time, Cunliffe said, the survey will help scientists, policymakers and the public at large understand the issues reefs are facing and work out what needs to be done to protect them now and into the future.
While the coral bleaching event probably won’t change rating models for now, the data will provide a valuable baseline that can be used for the next 20 years to assess how risk is going to change and how to advise clients to mitigate those risks.
The Seaview Survey is XL Catlin’s second major scientific sponsorship. It also sponsored an Arctic Survey that investigated sea-loss ice in the Arctic Ocean between 2009 and 2011.
7 Questions to Answer before Choosing a Captive Insurance Domicile
Risk managers: Do your due diligence!
It seems as if every state in America, as well as many offshore locations, believes that they can pass captive legislation and declare, “We are open for business!”
In fact, nearly 40 states and dozens of offshore locations have enabling captive insurance legislation to do just that.
With so many choices how do you decide who is experienced enough to support the myriad of fiscal and regulatory requirements needed to ensure the long term success of your captive insurance company?
“There are certainly a lot of choices,” said Mike Meehan, a consultant with Milliman, an actuarial firm based out of Boston, Massachusetts, “but not all domiciles are created equal.”
Among the crowd, there are several long-standing domiciles that offer the legislative, regulatory and infrastructure support that makes captive ownership not only a successful risk management tool but also an efficient entity to manage and operate.
Selecting a domicile depends on many factors, but answering these seven questions will help focus your selection process on the domiciles that best fit your needs.
1. Is the domicile stable, proven and committed to the industry for the long term?
The more economic impact that the captive industry has on the domicile, the more likely it is that captives will receive ongoing regulatory and legislative support. The insurance industry moves very quickly and a domicile needs to be constantly adapting to stay up to date. How long has the domicile been operating and have they been consistent in their activity over the long term?
The number of active captive licenses, amount of gross premium written in a domicile and the tax revenue and fees collected can indicate how important the industry is to the jurisdiction’s bottom line. The strength of the infrastructure and the number of jobs created by the captive industry are also very relevant to a domicile’s commitment.
“It needs to be a win – win situation between the captives and the jurisdiction because if not, the domicile is often not committed for the long term,” said Dan Kusalia, Partner with Crowe Hortwath LLP focused on insurance company tax.
Vermont, for example, has been licensing captives since 1981 and had 589 active captives at the end of 2015, making it the largest domestic domicile and third largest in the world. Its captive insurance companies wrote over $25 billion in gross written premiums. The Vermont State Legislature actively supports an industry that creates significant tax revenue, jobs and tourist activity.
2. Are the domicile’s captives made up of your peer group?
The demographics of a domicile’s captive companies also indicate how well-suited the location may be for a business in a particular industry sector. Making sure that the jurisdiction has experience in the type and form of captive you are looking to establish is critical.
“Be among your peer group. Look around and ask, ‘Who else is like me?’” said Meehan. “Does the jurisdiction have experience licensing and regulating the lines of coverage for other businesses in your industry sector?”
3. Are the regulators experienced and consistent?
It takes captive-specific expertise and broad experience to be an effective regulator.
A domicile with a stable and long-term, top-tier regulator is able to create a regulatory environment that is consistent and predictable. Simply put, quality regulation and longevity matter a lot.
“If domicile regulators are inexperienced, turnaround time will be slower with more hurdles. More experience means it is much easier operating your business, especially as your captive grows over time,” said Kusalia.
For example, over the past 35 years, only three leaders have helmed Vermont’s captive regulatory team. Current Deputy Commissioner David Provost is one of the longest tenured chief regulators and is a 25-year veteran in the captive insurance industry. That experienced and consistent leadership enables the domicile to not only attract quality companies, but also to provide expert guidance on the formation process and keep the daily operations running smoothly.
4. Are there world-class support services available to help manage your captive?
The quality of advisors and managers available to assist you will have a large impact on the success of your captive as well as the ease of managing the ongoing operations.
“Most companies don’t have the expertise to operate an insurance company when you form a captive, so you need to help build them a team,” Jeffrey Kenneson, a Senior Vice President with R&Q Quest Management Services Limited.
Vermont boasts arguably the most stable and experienced captive infrastructure in the world. Many of the leading captive management companies have their headquarters for their Global, North America and U.S. operations based in Vermont. Experienced options for captive managers, accountants, auditors, actuaries, bankers, lawyers, and investment professionals are abundant in Vermont.
5. Can the domicile both efficiently license and provide on-going support to your captive as it grows to cover new lines of coverage and risks?
Licensing a new captive is just the beginning. Find out how long it takes for the application to get approved and how long it takes for an approval of a plan change of your captive’s operations.
A company’s risks will inevitably change over time. The captive will need to make plan changes which can include adding new lines of business. The speed with which your domicile’s regulatory branch reviews and approves these plan changes can make a critical difference in your captive’s growth and success.
The size of a captive division’s staff plays a big role in its speed and efficiency. Complex feasibility studies and actuarial analyses required for an application can take a lot of expertise and resources. A larger regulatory team will handle those examinations more efficiently. A 35-person staff like Vermont’s, for example, typically licenses a completed application within 30 days and reviews plan changes in a matter of days.
6. What are the real costs to establishing and managing your captive?
It is important to factor in travel costs, the local costs of service providers, operating fees, and examination fees. Some states that do not impose a premium tax make up for it in high exam fees, which captives must be prepared for. Though Vermont does charge a premium tax, its examination fees are considered some of the least expensive options in the marketplace.
It is also important to consider the ease and professionalism of doing business with a domicile in the ongoing operations of your captive insurance company.
“The cost of doing business in a domicile goes far beyond simply the fixed cost required. If you can’t efficiently operate due to slow turn-around time or added obstacles, chances are you have made the wrong choice,” said Kenneson.
7. What is the domicile’s reputation?
Make sure to ask around and see what industry experts with experience in multiple domiciles have to say about the jurisdiction. Make sure the domicile isn’t known for only licensing certain types of captives that don’t fit your profile. Will it matter to your board of directors if your local newspaper decides to print a story announcing your new insurance subsidiary licensed in some far away location?
Are companies leaving the jurisdiction in high numbers and if so, why? Is the domicile actively licensing redomestications — when an existing captive moves from one domicile to another? This type of movement can often be a positive indicator to trends in a domicile. If companies of a particular size or sector are consistently moving to one state, it may indicate that the domicile has expertise particularly suited to that sector.
Redomestications made up 11 of the 33 new captives in Vermont in 2015. This trend is a positive one as it speaks to the strength of Vermont. It reinforces why Vermont is known throughout the world as the ‘Gold Standard’ of domiciles.
Asking the right questions and choosing a domicile that meets your needs both today and for the long term is vital to your overall success. As a risk manager you do not want surprises or headaches because you did not ask the right questions. Do the due diligence today so that you can ensure your peace of mind by choosing the right domicile to meet your needs.
For more information about the State of Vermont’s Captive Insurance, visit their website: VermontCaptive.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with the State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.