The majority of scientists believe that we are altering the earth's "carbon balance," launching mankind on a harmful collision course with nature. If this view is correct, climate change will be the defining risk management issue of our lifetimes, quite possibly exceeding terrorism, population expansion and the end of oil as the greatest cause of casualty and human suffering in the 21st century.
Global warming is an especially insidious problem in two key respects. First, there is a significant temporal gap between the causative agents of global warming and their effects. Thus, by the time the results of climate change are more than a mere nuisance to the average person, the dice will already have been cast.
Second, there are major financial disincentives to individual, corporate or even national action. As long as burning coal, oil or methane is more cost-effective than "greener" alternatives, fossil fuels will yield a competitive advantage over renewable energy. As with many problems requiring collective action, the rational choice of the individual, in a purely economic sense, differs from the rational choice of the group.
Whether as part of an individual or collective effort, human beings respond to climate change by mitigation and/or adaptation. Global warming mitigation strategies range from the simple--such as the reduction of greenhouse gas emissions through conservation and alternative energy use--to the complex--such as underground carbon sequestration--to the futuristic--such as blocking sunlight by ejecting sulfur dust at high altitudes.
Adaptation is a much more sobering concept. It is the response of individuals, businesses and communities to the consequences of climate change. In other words, adaptation is our response to what we failed to mitigate. Forms of adaptation include population exodus from coastal areas, constructing better levees, adopting stronger building codes and "seeding" clouds to control the rain.
The insurance industry is uniquely situated to assume a leadership role in advancing mitigation and adaptation efforts. First, the industry wields tremendous financial clout on an international level. Insurance is the second largest industry in the world, and its revenue exceeds the gross national products of every country except the United States and Japan. Second, the industry's expertise lies in risk identification, evaluation and management. The insurance industry has, in fact, adopted a prominent role in addressing climate change.
While the responses of individual insurance companies run the gamut, the insurance industry as a whole has been proactive in global climate change mitigation. Mitigation efforts by insurers include the development of new products, promoting awareness by example and investment into renewable energy. On Oct. 18, 2007, the CERES organization, a network of environmental groups and individuals, issued a report identifying 422 new products and services addressing global warming.
Innovative products range from "pay as you go" automobile premiums encouraging conservation to discounts for operators of hybrid vehicles. The Fireman's Fund and Lexington Insurance Co. now sell policies that permit repair or replacement of insured property with more expensive "green" products. Additionally, in October, 2007, a large group of insurers formed ClimateWise, an organization committed to supporting climate awareness among customers, incorporating climate change solutions into their investment strategies and reducing the environmental impact of their businesses.
American International Group Inc., Allianz, Munich Re and Swiss Re are among the members of the "Climate Group" which "works to accelerate international action on global warming with a new, strong focus on practical solutions." AIG and Munich Re participate in the Combat Climate Change organization--supporting adoption of a cap-and-trade system for CO2 emissions that involves a central authority setting a limit, or cap, on the amount of carbon or other greenhouse gas that can be emitted. Companies exceeding their allotted limits would have to purchase credits from companies that emit less.
AIG, Allianz, AXA, Royal SunAlliance and Swiss Re were among 150 corporate signatories of the Nov. 30, 2007, Bali Communiquédelivered to world leaders at the Bali Climate Conference, which petitions governments to provide a comprehensive, legally binding United Nations framework to tackle climate change; issue emission reduction targets to be guided primarily by science; and recognize that those countries that have already industrialized need to make the greatest effort.
Swiss Re has been a global leader on climate change for more than a decade, planning to be greenhouse-gas neutral by 2013, promoting awareness and reimbursing employees for certain qualified investments. Allianz mitigates against climate change by selling CO2 reduction certificates to its insureds and then investing the money in projects protecting the climate. And Aviva, the world's fifth largest insurance group, has been carbon neutral as a result of carbon-offset investments since 2006. There have been many other significant contributions by insurers, and new mitigation efforts come to light on almost a daily basis.
Insurance companies participate in adaptation by doing what they do best--underwriting. Increased premiums, deductibles and retentions--requiring minimum building standards and, in some cases, exiting from markets that appear to be experiencing the effects of climate change--all force individuals and businesses to reassess locating or expanding in coastal areas.
When a state insurance commissioner mandates coverage in these areas or when a state-funded insurer as in Florida becomes involved: (1) noncoastal homeowners and businesses must subsidize their coastal counterparts; and (2) the difficult, but necessary, process of adaptation is impeded.
Another example of adaptation occurs when insurers offer drought insurance in Africa or India. Coverage is linked to historical data on rainfall or temperature, with payouts triggered by weather during the growing season. These types of programs assist local farmers in adapting to changing weather patterns, and unlocking the potential agricultural value of the land. If, indeed, global warming occurs along the lines now predicted by the scientific consensus, many new adaptation techniques and strategies will be necessary to address the effects.
While the science of global warming still presents more questions than answers, the basic tenets of climate change are almost universally accepted in the scientific community. The predicted effects of climate change are beginning to manifest themselves, and future events may present challenges beyond those that the insurance and other industries have previously faced. At a time when action is required, the insurance industry has stepped forward and led by example.
BILL STEWART, co-chairman of Cozen O'Connor's Climate Change Practice Group, serves clients on a broad range of global warming and insurance-related topics.
March 1, 2008
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