In the movie, "The Day After Tomorrow," cities are wiped out by tsunami waves, tornadoes and hurricanes, and much of the planet is transformed into a frozen wasteland as global warming triggers the abrupt onset of a new ice age.
Although some of the more catastrophic climate changes that could result from global warming could still be many decades in the future, businesses are quickly discovering that a growing number of risks are very much in the here and now.
These risks are arising on a number of fronts.
Businesses are concerned about the risks related to the Kyoto "cap and trade" system that goes into effect in 2008. The system, which imposes national caps on greenhouse gas emissions, introduces a new set of risks for both the sellers of carbon-emission credits, as well as the buyers.
Top corporate executives are also at risk as they come under increasing pressure from shareholders asking for information about their strategies to address global warming and their response to government efforts to limit greenhouse gas emissions.
More than 150 climate-change resolutions have been filed by shareholders in the last five years, including a record 45 proposals in 2007, according to Institutional Shareholder Services.
Businesses are also facing the potential for liability related to damage to the environment caused by greenhouse gases, which were ruled a pollutant by the Supreme Court in April.
Some climate-change risks are only just beginning to emerge and are not yet well-understood.
But as these risks become clearer and easier to identify, insurers are beginning to explore possible solutions and develop products to help mitigate them.
"If you think about the whole issue about climate change, on the one hand it's of great concern to the industry and we think it's a challenge from a risk management perspective because--how can we protect ourselves best?" says Andreas Grunbichler, chief risk officer for Zurich Financial Services. "On the other hand, are there opportunities out there so that we can potentially offer new products to our customers?" he says.
It's a critical moment for the insurance industry, a kind of turning point in product development. As recently as a year ago, few insurers, if any, were giving serious thought to product development.
"Looking out at the response of the U.S. insurance world to climate change overall, it's been a very reactive response," says Andrew Logan, director of insurance programs at Ceres, a coalition of investors, environmental groups and other public-interest organizations.
Ceres has been trying to encourage insurers to tackle the problem of climate change--rather than retreating and limiting exposures--by looking for opportunities to be innovative and build shareholder value, Logan says.
"It's time to take a more proactive approach," he says.
Part of the problem has been that, until now, there hasn't been much demand. Without demand from buyers, insurers have had little incentive to develop new products. And yet, it's hard for people to clamor for something that doesn't yet exist.
"The insurance industry is still struggling with how to commercialize climate change," says Peter Breitstone, CEO of Aon Environmental Services Group.
But in the last year, there has been something of a sea change in the attitudes of both risk managers and insurers.
"A lot has happened in the last 12 months and, looking ahead 12 months, I think we're going to see a very different marketplace for all of this," Logan says. "I think we are on the verge of some sort of major breakthrough in activity by insurers." Some of the industry leaders so far have been American International Group Inc., Marsh Inc., Swiss Re, AXA and Allianz, which owns Fireman's Fund in the United States, Logan says.
"You always look at what kind of products are we going to create so we can be of assistance to clients?" says Joe Boren, head of AIG Environmental. "We're pondering that now."
These insurers have been working with clients to determine the potential risks and the types of coverage that might be needed.
In some cases, there could be coverage under existing policies. But in other cases, risk managers might need to double-check policy language and exclusions to make sure that the risks are covered. Or they might need entirely new products, still in development, to address the emerging exposures.
Areas where interest or a need for insurance coverage could be include:
* Carbon-emission credit delivery
* Renewable energy
* Environmental liability
* Directors' & officers' liability
* Commercial property/green building incentives
CARBON-EMISSIONS CREDIT DELIVERY
About a half-dozen U.S. and European insurers, including Swiss Re and AIG, have an appetite for providing carbon-emission credit delivery coverage, says Gary S. Guzy, national practice leader for emerging environmental risk at Marsh.
One policy has been placed so far, he says, while a number of companies say they have projects in submission.
Under the Kyoto Protocol, companies can generate carbon-emissions credits by building facilities that help to offset carbon emissions. Investment funds may buy these instruments as investments, while carbon-credit buyers purchase the credits or the right to buy the credits to address their own Kyoto Protocol compliance needs.
Investors and purchasers of these carbon-emissions credits face a number of risks, including operational risk, credit risk and pricing risk, says Dave Fields, president of AIG Risk Finance.
There is the risk, for instance, that the technology might not work and might not generate the expected credits. There is also the risk that the project could become insolvent or go bankrupt before delivering the credits. Or the credits might not be delivered and the buyer could be forced to purchase replacements on the spot market.
In addition, project developers are also at risk. There is, for instance, compliance and process risk associated with the approvals needed under Kyoto, says Ben Laskhkari, a director at Swiss Re.
ALTERNATIVE OR RENEWABLE ENERGY
In response to a raft of new regulations, new technologies are being developed to help reduce carbon emissions and generate energy in cleaner, more environmentally friendly ways.
"While there may not be any federal carbon capture or trade or tax implemented, several states have already taken moves to do that," says Rick Gibbons, executive vice president of Global Energy Property at AIG.
In addition, about 20 states have already enacted requirements related to the use of renewable fuels.
"That's already happening. So there's going to be tremendous growth in the area of what we are referring to as alternative energy or renewable energy," Gibbons says.
The owners of these new power generation plants and other businesses, as well as the investors in the projects, are interested in insurance to help protect their assets and investments.
Investors, for instance, have no guarantee that these new technologies will work. "There's a lot of activity out there for us to guarantee the technology so that investors can get some degree of comfort," says Ralph Mucerino, head of AIG Global Marine and Energy.
"It's something we're looking at. We think there might be a way of putting some form of efficacy product together with elements of machinery breakdown in it that is sensible for us and affordable (for clients)," he says.
AIG in April formed the AIG Global Alternative Energy Practice, which will provide services to U.S.-based alternative energy clients, including organizations engaged in biofuel, hydroelectric, geothermal, solar and wind operations.
"There are going to be new products and services that are going to be needed and required that we can't even think about just yet," Gibbons says. "The alternative energy practice allows us to dedicate and focus resources on dealing with the challenges of new technology, process and regulation."
The Supreme Court ruled in April that greenhouse gases are pollutants and that they should be regulated by the Environmental Protection Agency. In addition, the court ruled that states and municipalities are allowed to sue companies over greenhouse gas emissions.
The ruling could open the way for companies to be sued for greenhouse gas emissions and damage done to the environment.
Companies rely on their environmental policies to help protect them against lawsuits related to pollution and environmental damage. But it's not clear whether those policies will cover companies for greenhouse gases.
"That's going to be the test," AIG's Boren says.
Once a pollutant such as greenhouse gas is regulated, it might be something that could be covered under an environmental policy, he says.
"If there's a standard for a pollutant that exists and you want to buy coverage for pollution, we're going to cover it on a pollution policy," he says. Right now, with greenhouse gases, "we don't know what the standard is yet," Boren says.
Shareholders have become very interested in the topic of global warming and are seeking to determine how companies are managing their climate-related exposure and how this could affect shareholder value.
In addition, through initiatives such as the Carbon Disclosure Project and the Global Reporting Initiative, thousands of companies are being asked to report on their greenhouse gas emissions and management control strategies, according to Institutional Shareholder Services.
There has been "more and more clarity around the need for disclosure of climate risk information and increasing efforts for greater consistency and rigor and transparency in the disclosure of that information," Guzy says.
Failure to properly manage this problem, however, could lead to issues down the road, including lawsuits against the company's directors and officers.
Because there is no separate D&O policy to cover these exposures, risk managers need to double-check that they would be covered under their existing D&O policy.
"We're trying to let our customers know it's a potential issue as far as underwriters are concerned," says Christopher Lang, managing director at Marsh & McLennan Cos..
The important thing is to make sure that the existing D&O policy does not exclude coverage, Lang says.
"We've got a D&O policy, which by its nature is broad form," he says. "So let's make sure coverage exists there and it's not excluded."
GREEN BUILDING CREDITS
Rather than simply trying to reduce their potential for a loss, businesses can also take a more active approach on global warming by developing and moving into environmentally friendly buildings.
Fireman's Fund, a unit of Allianz, introduced in October a set of commercial insurance policies called Green-Gard to encourage the development of "green" buildings that save energy and reduce greenhouse gas emissions.
"We see there's a time when, if you don't offer a green building, you're not going to attract best tenants," says Steve Bushnell, product director at Fireman's Fund.
Green buildings tend to be energy and water efficient and use various materials that are less toxic and provide a healthier environment for workers. More and more buildings are being built as green and more existing buildings are being renovated as green.
"We felt we would want to develop a product that would attract these risks to Fireman's Fund, believing that, because of the process they go through to become green, they're going to be better insurance risks," Bushnell says.
In return for going green, developers and owners can qualify for a rate credit and receive expanded coverage through an endorsement that attaches to the standard policy.
The Green-Gard products include green building insurance, green upgrade insurance and commission coverage, which pays for a company to be able to rebuild green after a loss.
lives in New Jersey.
June 1, 2007
Copyright 2007© LRP Publications